Valuation-Informed Indexing #133 — Stock Market Prices Don’t Reflect Economic Realities

I’ve posted Entry #133 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stock Market Prices Don’t Reflect Economic Realities.

Juicy Excerpt: Why doesn’t everyone look at it this way? We get caught up in the short-term craziness. We look at prices instead of values (which can be properly identified by making an adjustment to the nominal price to reflect the P/E10 value that applies at the moment). We take the risk out of stock investing when we force ourselves to ignore price movements, which are chaotic because they are driven by emotion, and focus in instead on value movements, which have been highly stable for 140 years now.

Put $10,000 in an index fund and in 12 months time you will have an asset worth about $10,650. In 24 months, you will have an asset worth about $11,300. In 36 months, you will have an asset worth about $11,950. Like that.

Stocks provide safe and steady returns. They always have. They always will.

The only reason we don’t see it that way is that we get caught up in the short-term craziness. We shouldn’t. We don’t invest for the short-term. We invest for the long-term. So when we want to know the value of our portfolios, we should check out the long-term lasting values. not the short-term temporary values.

Adjusted prices are the real prices.


  1. Evidence Based Investing says

    “Stocks provide safe and steady returns. They always have. They always will.”

    You are obviously unfamiliar with stocks.

  2. Rob says

    You are obviously unfamiliar with the last 30 years of peer-reviewed academic research, Evidence.

    There’s 140 years of return data available to you on the internet.

    Check it out.

    The Wall Street Con Men would like you to believe that long-term stock returns are unpredictable and that thus you need to buy stocks at ALL prices to avoid the chance you will miss out.

    It’s not so.

    Stocks are like any other good or service that can be purchased for money. They are a good buy when sold at a fair price and a horrible buy when sold at an insanely inflated price.

    The data is there to help you, my old friend.

    The pain of saying “I Was Wrong” lasts 3 seconds. The rewards of knowing for the first time in your life how to invest effectively last forever.


  3. What says

    Check the stability of stock returns globally. They are not stable and the US is not the norm. Showing such ignorance after a lost decade of fooling around on the Internet is sad.

  4. Rob says

    You’re obviously not going to see the same level of stability in an emerging economy as you do in a long-developed economy, What. You’re not pointing to anything even a tiny bit surprising.

    Fortunately, the investor is not required to invest in markets that are not stable if he does not care to. There can be rewards for doing so for those so inclined. But it is a choice. If you want to avoid risk, you can elect non-risky choices.

    The “ignorance” comment is just more evidence of how emotional a strategy Buy-and-Hold is. I recall you being one of the ones saying that I was “ignorant” back in May 2002 when I was the first person in this field to point out the errors in the Old School SWR studies. If being ignorant means getting it right for investors ten years before any of the Big Shot “experts” in the field, hurray for ignorance!

    In all seriousness, the goal should be to get it right, What. You and the other Buy-and-Hold advocates have been getting it wrong for over 10 years now (it’s over 30 years if you date things back to when Shiller published his research showing that there is precisely zero chance that a Buy-and-Hold strategy could ever work for a single long-term investor!). It’s long past time to give it up re your “defenses” of this long-discredited “strategy.”

    If I am ignorant, then all the academic researchers in this field are ignorant, What. The Buy-and-Holders have had 30 years to produce peer-reviewed research showing flaws in Shiller’s work. Not one study has been produced that supports the Buy-and-Hold “idea” that there is no need for investors to consider price when buying stocks. Why not?

    I think it is fair to say that the only possible explanation is that Buy-and-Hold was a mistake going back to the first day. Please note that I do not say that the Buy-and-Holders were “ignorant.” They made a mistake. It happens. But they did make a mistake. And it does need to be corrected.

    And we all need to do what we can to see that the correction is made before the close of business today so that we can put all the nastiness we see from posters like you behind us.

    I wish you all the best that this life has to offer, What.


  5. Rob says

    Here’s an article that discusses the role that politics plays in what research we are permitted to see relating to marijuana and gun control:

    The thing that you say I am “ignorant” of is research findings that were discredited over 30 years ago (Prior to 1981, there really was research that was thought to support Buy-and-Hold).

    Is it me who is “ignorant” for knowing about the mistake that was made and the 30 years of peer-reviewed academic research reporting on that mistake? Or is it you who is ignorant for continuing to cite the long-discredited research as if it had some mystical power to control events three decades after it was shown to be in error?

    I know about both the discredited research and the research of the past three decades. You know only about the discredited research. Who is truly ignorant here, What?

    I mean no personal offense in referring to you as “ignorant.” My aim is to help you overcome your ignorance and the first step is obviously for you to acknowledge it. So I need to mention your ignorance. The purpose is to help you learn what you need to learn to become a more effective investor.

    Calling everyone who knows more than you about a subject “ignorant” is an emotional response, not a rational one. The rational response is to educate yourself to the point where you can engage in civil and reasoned debate on these matters.

    I’m rooting for you!


  6. Rob says

    Complete ignorance…lets see…

    Complete arrogance.

    This is 10 years AFTER you got it wildly wrong re safe withdrawal rates. And spoke arrogantly re THAT one!


  7. Rob says

    If I recall correctly, Europe was also developed before ww2.

    I presume that your point here is that a developed economy may take a very big hit.

    This is certainly so. But we shouldn’t aim for that. We should aim to AVOID that.

    The primary cause of WWII was the worldwide Great Depression.

    The Great Depression was one of the four economic crises caused by Buy-and-Hold investing strategies becoming popular. Please take a look at the historical data, What. The highest P/E10 level we have ever seen was the 44 that applied in January 2000. The second highest we ever saw was the 33 that applied just prior to the onset of the Great Depression.

    So the Second Great Depression will be much deeper and last much longer than the first. That is, if stocks perform in the future anything at all as they always have in the past.

    But stocks do NOT have to perform the way they did in the Great Depression. In 1929, we did not have available to us 30 years of peer-reviewed academic research showing us how stock investing really works. Today, we do. Today, we have available to us the research we need to bring the economic crisis to an end, to reduce the risk of stock investing by 70 percent and to bring on the greatest period of economic growth yet seen in U.S. history.

    Do you still think that the Ban on Honest Posting re what the last 30 years of peer-reviewed academic research says is such a wonderful idea, What?

    I think it is a terrible, terrible, terrible idea. For about 50 different reasons.

    Truly awful stuff.

    My best wishes to you.


  8. says

    I too agree with that. High stock price does not mean that the economical status of the company is high. You just have to analyze the cash flow of the company to get to know better about it.

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