Valuation-Informed Indexing #115 — Leading Figures in the Investing Field Should Be Planning Their Response to the Next Price Crash

I’ve posted Entry #115 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Leading Figures in the Investing Field Should Be Planning Their Response to the Next Price Crash.

Juicy Excerpt: Another big mistake was the failure of the leading figures in the field to let people know that stocks would likely be performing poorly for a good number of years to come. We have never recovered from a bull market by living through a single price crash. The P/E10 value has in the wake of every earlier secular bull market fallen to 7 or 8, a 65 percent price drop from where we stand today. How many of today’s investors know this?

I of course understand that the primary goal in the minds of those who were speaking out was to avoid panic. I presume that their motivation in presenting a rosy picture of the future was to offer reassurance. I don’t think that is at all a smart idea to overdo the reassuring words, however. To tell investors in 2008 that the worst of the bear market was over was akin to a doctor telling a patient with a cancer that has not been cured that the future is bright. That’s the message that the patient wants to hear and that’s the message that the doctor wants to tell but that’s not at all the right message to send. Truth matters.

It matters a lot. Why? Because people don’t seek reassurance only one time in a secular bear market (there are always multiple price crashes in secular bears). People are going to need to hear soothing words when prices crash again. And it is going to be harder to get them to believe the soothing words offered when they recall that the soothing words offered in 2008 did not prove out.

I am not suggesting that we should have filled people’s minds with visions of doom and gloom. The aim should be the opposite of that. The aim should be to build within people a real confidence in the future. That can be achieved with words that are 100 percent true. Yes, we are likely to see another crash. But the long-term value proposition of stocks really did improve dramatically with the 2008 crash. And the long-term value proposition of stocks will soar in the wake of the next crash. We could have told investors what to expect and reassured them in a lasting and real way.


  1. banned plop contributor says


    “When it gets to a point where it hurts them enough that they want to stop betraying their vision of what they wanted to do with their lives, their pride will melt and they will come to me… and Old Farmer Hocus will still have the hand of kindness extended to them…”

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