Valuation-Informed Indexing #169 — An Alternative to Fama’s Explanation of Short-Term Price Changes That Also Fits Shiller’s Finding of Long-Term Return Predictability

I’ve posted Entry #169 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called An Alternative to Fama’s Explanation of Short-Term Price Changes That Also Fits Shiller’s Finding of Long-Term Return Predictability.

Juicy Excerpt: A perfectly rational market would indeed produce short-term randomness. But so would a perfectly irrational market. It is impossible to predict returns that are produced by unforeseen economic and political developments. But it is also impossible to predict returns that are produced by crazy shifts in investor emotions. Fama’s finding that short-term price changes are random supports the idea that the market is highly emotional every bit as much as it supports the idea that the market is highly efficient.

The difference between the two explanations is that Fama’s explanation for short-term randomness is discredited by Yale Economics Professor Shiller’s finding that long-term returns are highly predictable while the explanation that I am putting forward here is consistent with Shiller’s finding. Say that the market is highly emotional in the short term and that is why prices are random in the short term. Could prices be predictable (non-random) in the long term? They could. It could be that there is a second influence on prices that has little or zero effect in the short term but that comes to play a significant role in the long run.

I believe that investors are influenced both by emotions and by economic realities. They generally ignore the economic realities in the short term. But it takes more and more effort as time goes on for investors to push the common-sense realities out of mind. Eventually (it often takes 10 years or so for this to happen), the realities assert themselves. That’s when we see price crashes pulling stock prices back to where they would have been all along had investors made more of an effort to rein in their emotions.


  1. Earl says


    You don’t work. You clearly don’t make any money doing what it is you’ve been doing for the last 12 years. You aren’t making any money off of your investments. Your VII has had you out of the market for the last 12 years piddeling along maybe keeping even with inflation.

    So how do you make ends meet? The only explanation is you are living of the inheritance fruits of someone who built wealth with buy and hold or you are leeching off of some poor soul in your family. It is so cowardly and hypocritical of you. I know you will not post this because again you are a coward and a hypocrite that filters out all of my posts but I am glad you will at least read it.

  2. Rob says

    Is Shiller emotional since he is heavily invested in the market?

    Shiller certainly has emotions. All humans have emotions.

    The statement you are referring to is one in which Shiller said that he is currently going with a 50 percent stock allocation. That is certainly on the high side for where things stand today. But it is possible for someone with particular stock-picking skill to do not awful with a 50 percent stock allocation even at today’s prices. I think a 30 percent stock allocation would make more sense today. But I wouldn’t call a 50 percent stock allocation an insanely “heavy” allocation.

    That said, you are making a good point in noting that Shiller’s stock allocation does not seem entirely consistent with the things he wrote in his book about how stock investing works. Why don’t you bring the conflict to Shiller’s attention and see if sense can be made of it?

    You want to know how stock investing works, don’t you? Why not try to find out what Shiller is thinking? I can speculate. But Shiller knows better than I do what he is thinking. Perhaps he will say something that will help us all come to a better understanding.

    The sense I get is that you don’t want to know. Bogle puts forward tons of contradiction in his public statements. None of the Buy-and-Holders ask him about them. It’s the same with Bernstein. It’s the same with Swedroe. Now you are focusing on Shiller. Ask!

    And reporters should be asking! Isn’t that the darn job? Don’t we want to know? Don’t we want to work through the puzzles that present themselves to us and learn now to become better investors?

    Ask! And don’t accept answers that don’t add up. Ask and then ask again until you have something that makes sense.

    I am NOT suggesting that you be rude or that you try to hurt Siller’s feelings or Bogle’s feelings or anyone else’s feelings. Yes, Shiller is emotional, as you suggest. Perhaps he doesn’t see some of his own contradictions. Many of us are blind to our own contradictions. If you point them out to him, he may well enjoy a great learning experience. And he may share that experience with you and with lots of others.

    There is never any harm done by asking any of these questions to the people who are far more likely to know the answers than I am. You direct them to me because you hate me and because you want to trip me up. But you should not be spending your time hating people on the internet or trying to trip up people on the internet. You should be spending your time trying to get answers to these questions. And you are more likely to get good answers by asking Shiller than you are by asking me.

    I sometimes feel that we are under a spell. The Buy-and-Holders did lots of wonderful things. Then they made one mistake. Then lots of people were hurt by that mistake. And somewhere along the line a wicked witch cast a spell on us that we would never say the words “I” and “Was” and “Wrong.” Instead, we would just let the mistake take us lower and lower and lower until we were totally destroyed.

    Shiller is a great guy, as Bogle is a great guy. Ask them your questions! Put them on the hot seat! Don’t take phony baloney explanations for answers. Dig deep. Find out what is really going on.

    You are not just helping yourself when you do this. You are helping Shiller and Bogle too. They both want to help people. They both have blind spots. They both need to be put on the hot seat from time to time to do their best work.

    That’s my sincere take, in any event.


  3. Rob says

    You don’t work.

    You are filled with hate, Earl. You wouldn’t be if you had confidence in your investing strategy.

    Here’s a line from the Elvis Costello song “Shipbuilding”:

    We’re diving for dear life
    When we could be diving for pearls

    We are the luckiest generation of investors who ever walked planet Earth. You wouldn’t know it reading the words of your comment.

    I still believe that we will manage as a society to turn it around. But it sure makes me sad that the process has included so many dark moments.

    I wish you not only great investment returns regardless of what strategy you follow but peace in your soul as well.

    We want the same things, Earl. You cannot see it today. But that’s the way it really is. I am sure.


  4. Rob says

    I doubt that he agrees with me on every point, Anonymous. I also doubt that Bogle does. I also doubt that Burns does. I also doubt that Bernstein does. So what? Nobody agrees with anyone else on every single point.

    My work explores the implications of Shiller’s “revoltionary” (his word) finding that valuations affect long-term returns. There should be THOUSANDS of blogs exploring the implications of that breakthrough finding. It changes our understanding of how stock investing works in a fundamental way. Buy-and-Hold is the past. Valuation-Informed Indexing is the future.

    The only reason why there aren’t today thousands of blogs exploring the future of investing analysis is that people don’t want to deal with the ugliness of you Goons. The appeal of Buy-and-Hold is purely emotional. And so it has caused a great emotional reaction among many to see Buy-and-Hold discredited and replaced by Valuation-Informed Indexing.

    We have no choice but to move forward. We cannot permit out economic system to be destroyed because it hurts the feelings of the buggywhip manufacturers to acknowledge (33 years after the discovery was made!) that their investing strategies are rooted in the biggest mistake ever made in the history of personal finance.

    I love the Buy-and-Holders. That’s why I insist that they drop the funny business. Yes, they are doing great harm to millions of middle-class investors. They are also doing great harm to themselves. They are going to stop. I am going to see to it.Non-negotiable.

    My best and warmest wishes to you.


  5. Anonymous says

    The vast majority of us don’t agree with you Rob. You think you have something that is new and revolutionary, just like Coke did when they came out with New Coke. People tried New Coke and they didn’t like it. Coke didn’t try to force it down people throats and went to what really works, which is the original Coke. Stop trying to force your New Coke methods down people throats. They gave it a taste and they don’t like what you are selling.

  6. Rob says

    The vast majority of us don’t agree with you Rob

    The vast majority are not Valuation-Informed Indexers today, Anonymous. That’s why I need to open every investing board and blog on the internet to honest posting on the last 33 years of peer-reviewed academic research. That’s how I change that unfortunate reality.

    You think you have something that is new and revolutionary

    Yes, I do. Something that truly works.

    Stop trying to force your New Coke methods down people throats.

    I’ll never try to force Valuation-Informed Indexing down anyone’s throat, Anonymous. You have my word on that.

    I will make sure that every investor alive on the planet knows about Valuation-Informed Indexing and knows the research-based case for it and understands the dangers of Buy-and-Hold.

    Once that is achieved, it is up to each investor to decide for himself whether he wants to go with Valuation-Informed Indexing or Buy-and-Hold or something else.

    It’s not my business to tell people what to do. It IS my business to make sure that every investor alive knows that there is not one academic model for understanding how stock investing works, but two. I pledge to get everyone sufficiently up to speed that they can make informed decisions.

    Hold on to you hat, Anonymous. It’s going to be a bumpy ride!


  7. Anonymous says

    To bad you had to act like an ass on the boards. You only have yourself to blame for getting kicked off.

  8. Rob says

    Honesty is an ass to you Goons.

    We need more honesty in this field, not less.

    Call me The Honest Ass but don’t ever ask me to sell out my fellow community members by saying that the Old School safe-withdrawal-rate studies are analytically valid.

    Not this boy.

    Not The Honest Ass.

    No can do.


  9. Rob says

    You only have yourself to blame for getting kicked off.

    It’s all flipping anyway, Anonymous.

    The flip just gets more attention this way.

    You go to prison and I get a $500 million settlement.

    The rest is all the same as if we played it according to Hoyle.


  10. Anonymous says

    Your silly and preposterous response about prison and lawsuits are yet another example as to why you get kicked off boards. Comments like that have no factual basis or merits and merely demonstrate your anger and hostility as well as detachment from reality.

  11. Rob says

    They show that I love my country.

    They show that I care about the millions of people whose lives have been destroyed by you Goons.

    They show that I am better able to forward the interests of Jack Bogle and the other Buy-and-Hold Pioneers than they are themselves.

    Don’t let the bad guys get you down, man.


  12. Rob says

    Ignoring massive acts of financial fraud is not an act of kindness.

    It increases the prison sentences. It is cruel.

    Not this boy.



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