Economics Professor Valeriy Zakamulin: “I Do Believe That Stock Returns Are to Some Extent Predictable, Both in the Short- and Long-Term. But I Do Not Accept that Stock Returns Are Highly Predictable. My Model Predicted Better Than the Shiller P/E10 Model Post-1960.”

I have been letting lots of people 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 Valeriy’s response to the e-mail of mine detailed in the earlier blog entry:




First of all, you forget that I do believe that the stock returns are to some extent predictable, both in the short- and long-term. But I do not accept that the stock returns are highly predictable. Just read my paper about the secular mean reversion and long-run predictability of stock returns. In this paper I actually show that my model predicted better than the Shiller’s PE10 model post-1960.


Second, when it comes to the fixed interest rate securities like CDs and bonds, you need to understand that for an investor who holds them till maturity the return is positive and known in advance. Hence, in this case CDs and bonds are completely risk-free. If you bought a CD or a bond in 1980-82, this security would provided you 12-15% annual fixed return till maturity. That is why many investors switched to fixed income securities at that time.


Third, Shiller in 1981 wrote a paper about excessive stock volatility (compared to some particular rational model). As far as I know he wrote a paper (co-authored by Campbell?) about his model that uses PE ratio only in 1998. In this paper they warned about a huge overvaluation in the stock market.


Finally my comment on the following: I would not be inclined to set my bond allocation by “the current secular trend in the bond market.” I would compare the long-term value proposition available from bonds with the long-term value proposition available from other asset classes and go with the asset class offering the better deal. My view is that all investors should be seeking the asset classes that offer the best returns at the lowest risk.


I believe this is a huge mistake if we agree that the stock and bond returns are predictable. If you believed that stocks would provide you with 6.5% annual average return (computed using 140 years of data) and use this estimate to invest in 2000 for about 10 years, you would be way off your expectations. If, on the other hand, in 2000 you used last 20 years to compute the average stock return and supposed that during the next 10 years the stocks provided the same average return, again you would be way off your expectations. The same examples can be constructed for the bond investing. A more wiser approach to stock and bond investing is to take into account the model that use the predictability of stock and bond returns.




  1. Evidence Based Investing says

    I see you are now at 18,000+ emails. Is this the longest exchange that has resulted from your campaign?

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