I’ve been sending e-mails to numerous people letting them know about my article reporting on The Silencing of Academic Researcher Wade Pfau by the Buy-and-Hold Mafia.
Yesterday’s blog entry reported on a response that I received from Valeriy Zakamulin, a professor in the Department of Economics and Business Administration at the University of Agder, and my reply to that response.
Valeriy then wrote:
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Dear Rob,
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There are currently a few working papers that explore how to use the Shiller’s PE ratio for long-term investing, see for example
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http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2129474
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In financial industry there have been developed market indexes to facilitate the implementation of the Shiller’ idea, see for example
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http://www.indexuniverse.com/sections/news/14498-barclays-shiller-hatch-pe-linked-indexes.html
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When it comes to your question “Do you know of any that show the opposite — that long-term market timing does NOT work”, you see, science is not the law where there is “presumption of innocence”. That is, we cannot assume the existence of predictability just because there are no studies that fully reject it. Besides, there are many different forms of predictability, many signals/variables/models that can be used. In science one first introduces a hypothesis and then test it. Thank god we have the Efficient Market Hypothesis! This provides us with a very simple benchmark to test different deviations from the EMH. Usually in science one first publishes a paper that shows evidence of predictability (using for example a specific signal/variable/model), then, if researchers finds some flaws in the paper, they publish papers that demonstrate these flaws and what happens if one takes into account these flaws.
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How science works, see for example
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http://en.wikipedia.org/wiki/Karl_Popper
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It seems to me that you believe in some sort of “conspiracy”, that the majority of academic researchers deliberately support the faulty idea of superiority of Buy-and-Hold strategy. May be a few of them do, mainly because there have studied it, and we lecturers tell about it, sometimes without due critique. But it seems to me that the buy-and-hold strategy is mainly supported by industry practitioners who earn money by investing other’s money in stocks. Their salary depends on how many people invest in the stocks, no matter the long-run outlook, whereas a salary of an academic researcher is not.
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On the other hand, let us assume that everybody uses a market timing strategy that works. Then imagine what happens with the stock market and economy when everyone sells stocks and switches to money markets. There will be a total financial disaster and long-term economic collapse! Will people be better off? I doubt. Have you ever thought about this?
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Valeriy
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