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 my correspondence with Economics Professor Valeriy Zakamulin. Set forth below is the text of the e-mail that Valeriy sent me in response to the e-mail detailed in the earlier report:
>
Dear Rob,
>
I apologize for not being able to respond to all points in your mail, I just do not have so much time.
>
When it comes to the paper of Arnott, co-authored by Nobel Laureate H. Markowitz, I am familiar with the paper. First, if a Nobel Laureate co-authors a paper, this does not automatically means that this paper is an excellent paper (if you are interested in the flaws of other Nobel Laureates, read about the collapse of the Long Term Capital Management http://en.wikipedia.org/wiki/Long-Term_Capital_Management). This paper does have some weaknesses. For example, the size effect is mainly due to the January effect, the value effect is also partly due to the January effect. This paper, which supposedly explains both the size and value effects, cannot account for the January effect.
>
I can understand why Robert Shiller cannot tell people about all his ideas on how stock investing works. Being a recognized Yale Professor, he must act very professionally, he can only tell those that are supported by scientific research.
>
It seems to me that you do not really understand how the market timing strategy works and a possible total collapse of the stock market. From the long-term perspective, the period of 1990s was a period of a great stock market bubble according to the PE10 model. But was it rational to withdraw money from stocks in 1990 and put them into bonds? Not at all, if you used Shiller’s model you would miss the great return over 1990s. Market timing strategy implied selling the stocks in about 2001 and place money in bonds. But what if all investor pursued this strategy? I am sure that all the stock prices would dropped to zero. You disagree with the assumption that investors are rational, but at the same time you actually believe that investors are rational and the mass sale of stocks ends when the PE10 ratio approaches its long-term average. This will never happen if the investors are irrational. As a proof of my point, read about the stock market crash of 1987 (see for examplehttp://hnn.us/articles/895.html). One of the main causes was the popularity of the portfolio insurance strategy which requires selling stocks when prices drops. When everyone implements this quite sensible strategy, then the stock market crashes.
>
I am not familiar with the papers by W. Pfau, if they were critisized, maybe the critique was well grounded?
>
I believe that if people knew about PE10 model in 1970, then the period afterwards would be a period of only good economic times. Here you are wrong. The stock market is only a barometer of the state of economy. I believe that for a capitalism economy it is natural to have periodic boom-bust cycles.
>
Valeriy
feed twitter twitter facebook