Set forth below is the text of a comment that I recently put to another blog entry at this site:
So prices were or were not ‘regulated’ before the Internet since there was no posting at all?
Stock prices are SELF-regulating, Laugh. But this is so only so long as investors have easy access to the information they need to understand what they need to do to obtain good results.
That’s of course so in any market. Say that we didn’t allow people buying bananas to have access to the information they need to know how much they are paying for bananas. People who wanted bananas could take them to the register and purchase them. But they could never know in advance how much they were paying. What do you think would happen to the banana market in those circumstances?
Very bad things. The price of bananas would shoot up. Then they would shoot up again. Some people would swear off bananas. Which is a bad thing. The purpose of a market is to get people what they want at a good price. Having people swear off the product being sold is not what you want. What you want is people demanding better prices and getting them when they threaten to take their business to competitors. The back and forth between the sellers (who naturally want high prices) and the buyers (who naturally want low prices) is the magic that makes markets work. Take away that magic and you no longer have a functioning market.
We do not have that magic today in the stock market. Buy-and-Holders don’t let prices (valuations) influence their purchasing decisions. They buy the same amount of stocks at any price. That is why we are in an economic crisis today. The stock market is a big market. When that market collapses, lots and lots and lots of people get hurt.
We did not have the information needed to invest effectively for many years. That wasn’t the fault of the Buy-and-Holders. It was just one of those things. We don’t know it all. So we have had market collapses before. We had one in the early 1900s. We had the Great Depression. We had the Stagflation of the 1970s. Investing was not a subject of academic study in those days. So it wasn’t the cover-up of studies that was causing the problem. It is just the sad fate of the humans not to know some things.
Our luck changed when the Buy-and-Holders argued that investing SHOULD be the subject of academic research. That was a huge breakthrough. The Buy-and-Holders came up with many powerful insights as a result of their belief in following research-based strategies. Then they made one mistake (as just about all pioneers are certain sooner or later to do).
They discovered that short-term timing never works. That was a huge breakthrough, the second most important breakthrough in the history of investing analysis. Unfortunately, the Buy-and-Holders jumped to an unfortunate hasty conclusion. They came to believe (based on no research whatsoever) that, since short-term timing never works, it might be that there are occasions when long-term timing is not absolutely required either. Nothing could be further from the truth. The entire 140-year historical record shows that long-term timing is ALWAYS 100 percent required of every investor hoping to have any realistic hope whatsoever of long-term investing success. But the Buy-and-Holders never did research on this point. So of course they didn’t know.
Yale Economics Professor Robert Shiller (he won the Nobel prize a few weeks ago) did this research (the most important research ever done in this field) in 1981. NOW we knew (for the first time in the history of Planet Earth) how stock investing really works. I co-authored follow-up research with my good friend Wade Pfau (Wade holds a Ph.D. in Economics from Princeton) a few years ago showing that investors who root their strategies in the findings of the peer-reviewed academic research (a practice that the Buy-and-Holders once advocated but one which they have come to hate with a burning passion since the research was published showing that they once made a perfectly understandable mistake) thereby reduce the risks of stock investing by 70 percent while increasing their returns enough to retire five to ten years sooner than Buy-and-Holders.
That’s where we stand today, Laugh.
Stock market prices have always been self-regulating. But that can never help us until investors KNOW how stock investing works. We were all ignorant of how stock investing works until Shiller did his “revolutionary” (his word) research in 1981. From 1981 through 2002, there was a combination of cognitive dissonance and an industry cover-up (more the former in earlier years and more the latter in later years) keeping us from learning what we need to know to reduce the risk of stock investing by 70 percent. I came along on the morning of May 13, 2002, with a post to a Motley Fool board pointing out the errors in the Old School safe withdrawal rate studies and we were off to the races.
We know today what we need to know to transform stock investing into an essentially risk-free endeavor. But we “know” it only in that we have 32 years of peer-reviewed academic research showing it. We need to take the next step. We need to make use of the internet to spread the word with the millions of middle-class people that comprise the market. Once they learn the realities, the economic crisis comes to an end and we enter the greatest period of economic growth in U.S. history. The trigger point will be my good friend Jack Bogle working up the courage to walk to the front of a room and say the words “I” and “Was” and “Wrong.” Once Jack says those words, we won’t be seeing any more death threats or board bannings or defamation or threats to get academic researchers fired from their jobs.
The day of Jack’s speech will be one of the greatest days in the history of the United States. It will be the day of our financial liberation, the day we as a people break free from Buy-and-Hold “ideas” and all the human misery that naturally follows from them. I look forward to that day very much. I know that on some level of consciousness you do too, my old friend.
Please take good care.