Yesterday’s blog entry set forth the text of an e-mail that I received from Mark Guthner, author of the blog The Angry Grapes: Chronicling the Great Depression 2.0. Set forth below is the text of my April 11 response.
Thanks both for taking the time to read the Knol and for taking the time to send me those comments, which of course help me think things through more carefully. If it is okay with you, I would like to post your comments at my blog. Please let me know if you would prefer that I not do that.
I recently had someone else write me raising a similar thought, that it was monetary policy that caused the problem. I don’t believe that that is the primary problem. But I just wanted to start off by noting that there are lots of smart people who see things differently than I do. My ultimate view is that we need a national debate on these questions so that we can sort out some of the different viewpoints and perhaps over time come to a better-informed consensus viewpoint than the one that applies today (the Buy-and-Hold Model — I of course understand that your view, while not entirely in accord with my own, is also not entirely in accord with the conventional understanding of today).
My belief is that stocks are ALWAYS in danger of rising to insanely overvalued price levels. The danger comes from the fact that investors have the power to set the price of stocks wherever they want to set it. All people naturally want to have more wealth than they do in fact possess. The holders of other asset classes do not have the power to magically vote themselves raises. A money-market account pays what a money market account pays and there is nothing that anyone can do about it. However, the price of stocks is set by the owners of stocks. If we all want to double our wealth, we can just vote prices up to double fair value. If we want to triple our wealth, we can just vote prices up to three times fair value. Why not do so?
My view is that the only brake on insane price increases that exists is our memory of the economic destruction that follows from giving in to our natural human inclination to wildly misprice the stocks we own. I see it as the primary task of any investing model to remind stockholders over and over and over again of the risks of a Buy-and-Hold approach, to remind stockholders over and over and over again of the need to exercise price discipline when buying stocks (to lower your allocation when prices get too high and thereby to do your part to pull prices back to reasonable levels). Whenever we “forget” the importance of doing so, the human weakness that causes us to believe in Buy-and-Hold takes over and we destroy our wealth and our economy and then need to get about the business of rebuilding it. Valuations rise and fall as part of a cycle in which we accept the realities of stock investing and the “forget” them for a time and then are reminded of the price that is paid for forgetting them.
Again, thanks for giving this your attention. Receiving your note cheered my day.