Set forth below is the text of a comment that I recently put to Wade Pfau’s blog in response to a post in which he noted that “valuations and long-term investors is a rather controversial topic” and that he does not expect to be writing many more research papers on the topic.
Your contributions in this area are huge, Wade. So no one can find fault with you for taking a break from the valuations topic. I only hope it will not be a permanent break. We need you!
You are of course 100 percent right to describe this topic as “controversial.” You need to ask yourself why that is. It’s because this question is so darn important. This issue won’t go away. It is our lack of understanding of how valuations affect returns that is the primary cause of the economic crisis (in my view!) and, if the things that those who study valuations say is so, that crisis will be getting a lot worse before it comes to an end. I believe that as a society we will have no choice but to face up to this one, whether we like the idea or not.
One thing I can tell you as someone who has been fighting on the front lines for nine years now is that things are getting better. A few years back, I was blacklisted at just about every personal finance blog on the internet. Last week, I attended a financial bloggers conference and received a warm greeting from everyone I met. I cannot say that everyone agrees with me today. That’s not close to being true. But there has been a big change in the public mood over the past three years and my sense is that things are continuing to move in the right direction.
Once some of the pieces that have not yet clicked for you click into place, you will be able to think of hundreds of research papers to write in this field. I really mean that. Accepting that valuations matter will be the biggest advance in our understanding of how stock investing works in history. It is akin to the discovery of how electricity works and can be harnessed for the benefit of mankind. Think how many inventions followed from that! When we learn how to use valuations in setting our stock allocations, we are learning how to rein in the most dangerous investor emotions. Unexplored territory!
I wish you the best in all your future endeavors. I have already cited your work dozens of times and am confident that I will be citing it hundreds of times in the future. We have a tiger by the tale here!
Rob
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