Yesterday’s blog entry reported on an e-mail sent to me by Academic Researcher Wade Pfau on December 2, 2011. My response, sent the same day, is set forth below.
Your research IS Nobel Prize stuff.
It could be that you are just being humble or that you are pulling my leg. But in the event that you are serious in thinking that you are not in Nobel Prize territory, I want to disabuse you of that notion. That is where this is leading.
You note that many articles that led to Nobel Prizes were first rejected. The obvious question is — Why? Why was the merit not seen on first presentation? It is that knowledge generally advances gradually over many years and then there are occasional giant leaps forward. The giant leaps are hard to follow and appreciate. This is a giant leap. So people are going to misunderstand it for a time.
The opportunity is to put everything in place during a time when few are able to appreciate the accomplishment. And, then, when large numbers of people come around, the work is done and all you need to do is to point to it. If, at the time people become interested in a new path, you have already cut through the path, you are there. That’s how it is done.
Shiller certainly merits a Noble Prize. He was asking the right annoying questions at a time when few saw the need to ask them. But Shiller (somewhat inexplicably) does NOT tell the full story. You can read 300 pages of Shiller’s fine book and not come across one paragraph telling you how to invest. People need that. People need to hear the how-to that follows from Shiller’s theory. That’s the Nobel Prize waiting to be won.
You say that “I was discouraged when I first received the desk reject…I realized that I didn’t have a chance with one of the top journals.” I don’t understand the background here. The suggestion here is that, if this lower journal rejected you, the higher ones would too. I have no knowledge base to know if that is so or not. I know the importance of the article. I am not able to say what considerations would come into play when editors decide whether to publish it or not.
Can you describe the general reaction you have seen to your work on valuations questions? Mel Lindauer obviously has been hostile. There is a sense in which that can be taken as a GOOD sign. Have others been hostile? Or intrigued? Or excited? Or indifferent?
I’ll tell you one story from the blogger’s conference just to give you a sense of both what you are up against and how huge the opportunity is that presents itself. I had breakfast one morning with a fellow blogger. We spent two hours talking warmly about a dozen different subjects. He indicated that he wants to move into the investing realm. I made my pitch for working with him. As soon as I started talking to him about it, his eyes glazed over. He did not want to hear this. It was
like looking at a cartoon illustration of a point.
Now, that is very hard to overcome. If the journal editors have that attitude, you are not going to change their minds by writing a great article. That’s the bad news. The good news is that that attitude has been keeping competitors out of these waters for three decades. We are 30 years behind in the research we should have been doing in this field. When the eyes stop glazing over, there is going to be a huge boom. Some will be positioned for it and some will not be positioned for it.
I can point you to many questions that merit study. The problem is that, to go deep, you need to consider methodologies that will be viewed as unconventional. I’ll give one example. People ask me all the time what it means that the P/E10
is now 21. A P/E10 of 21 does not mean the same thing on the way down as it does on the way up. This particular 21 is a very dangerous 21. People don’t want to hear that. They want to hear that 21 means x and that same rule always holds.
The market has a memory. That’s one of the new ideas. With Buy-and-Hold, the market is being created fresh each day. With VII, what happened yesterday has an influence on where we are today, which is connected with where things will
be tomorrow. It’s an entirely different mindset to think of each day being a separate event vs. understanding that each time-period arises out of and influences those surrounding it.
The question that should be on every policymaker’s mind is — What will we do after the next crash? The next crash will be putting us in the Second Great Depression. We will desperately need to win back the confidence of investors. If they continue to believe that each day’s market is a separate event, there will be no effective means to counter their fears available to us. If we effectively make the case that the market has a memory, we will be able to make a convincing case that investing in stocks will at that time be a smart move. It is going to be critical that big names be able to make this case effectively and quickly. Too slow a response and the entire global economy could collapse.
Your work could make the difference.
Yes, I lay it on thick. But honestly. This is my sincere take.
Anyway, that’s enough for one e-mail. But I do think you have a Nobel Prize in your future if you care to reach for it and do battle with the dragons that will try to stop you from having it. There will be frustrations and disappointments and hostile reactions. But we are getting to the point where the wall is beginning to break down, so those negatives are becoming less of a factor.
Here’s another thing you might want to look at. Under Shiller’s model, it is not the economy that causes stock price changes but stock price changes that cause economic busts and booms. Would you have an interest in exploring an angle that has nothing to do with investor choices but with how Shiller’s work points us to a different understanding of what caused the four economic crises we have seen this Century (every one followed from a P/E10 level of 25 or above)? Why is it that
economists blame protectionism for the Great Depression? Doesn’t it make more sense to say that it was high stock prices, which caused a painful crash, which caused widespread panic, which caused the protectionism? We wouldn’t have had the problem with the protectionism if we had stopped the bull market from developing in the first place. Why didn’t we try? Can we afford to continue not trying in today’s environment?
I hope I have perhaps sparked a few new thoughts that will save you from the boring business of sitting around with too much time on your hands in 2012.