Set forth below is the text of a comment that I recently put to a discussion thread on a Guest Blog Entry I wrote for the Invest It Wisely site:
It is a fact that buying overvalued assets is a likely road to a low return.
You always have an encouraging word to offer, Barbara. I don’t often hear too many of them. So I am most grateful.
I think it would be helpful if people would try to think through some of the implications of the words of yours that I have quoted above. Just about everyone agrees with that statement. Even my harshest critics acknowledge that valuations affect long-term returns. But most people do not believe that stock returns can be predicted.
It’s logically impossible that both of these two beliefs can be accurate. To say that something affects something else is to say that it causes it. If valuations affect long-term returns, valuations cause long-term returns. So pretty much everyone today agrees that we know thecause of long-term stock returns.
Now that we know what causes long-term returns, shouldn’t we now be able to predict long-term returns effectively, at least to some extent? Doesn’t that logically follow?
There can be reasonable disagreements as to the extent to which prediction is possible. I don’t have a problem with that. But it seems to me that there should be something close to universal agreement that long-term returns are to some extent predictable. And that news is so exciting that I also believe that all of us should now be looking carefully into the question of how predictable returns are. If it turns out that they are highly predictable, we have changed the history of stock investing in a fundamental way.
To the extent that returns are predictable, stocks are not risky. Risk is uncertainty. Make something predictable and you eliminate uncertainty, which is to say you eliminate risk. We are on the threshold of making stocks a low-risk asset class. This is the most exciting time in history to be studying how stock investing works. It’s like we just discovered electricity. There are a thousand wonderful inventions waiting to be invented in coming days once we all acknowledge the incredible power of what we have already learned.
We know that long-term returns are predictable. We don’t know how much. Why not get about the business of figuring out how much? I can tell people what I have learned or what I think I have learned — the research available to us today shows that long-term returns arehighly predictable, the data shows that we can reduce the risk of stock investing today by 80 percent from what it was in all earlier times. But I could be wrong. Other people should be looking at this. This is the most exciting field of discovery that those interested in stock investing have ever stumbled upon.
I’ve seen a lot of friction in the first nine years of these discussions. That makes me sad. In part it makes me sad just because I don’t like friction. But the other reason it makes me sad is that too many people are failing to see the huge opportunity here. We have the potential here to advance our understanding to an amazing extent.
My partner in these efforts for eight years was John Walter Russell, a very smart and very kind man who died in October of 2009. John and I used to joke that we were clearing the underbrush at a future beach resort that today looked like a bunch of weeds but that in future days was going to be the premier vacation spot in the world. We could see where things were headed and others just couldn’t see why we kept hacking away at those weeds with such energy.
This thing will in time lead us all to some amazing places. That’s the point I am trying to make here. Anyone who wants to go down in history as having played a pioneering role will be welcomed to the club with open arms. There’s lots of important and highly fulfilling work to be done and remarkably little competition for the available slots. It’s good piled on top of good piled on top of good piled on top of good. You don’t see that too often down here in the Valley of Tears.