I’ve posted Entry #175 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller Places Too Much Emphasis on “Bubbles.”
Juicy Excerpt: It’s a mistake to focus on bubbles because there really is nothing special about bubbles. Shiller’s breakthrough was not discovering bubbles. It was discovering that it is investor emotions rather than economic and political developments that set stock prices. This reality applies during bubbles. But it also applies at times when stocks are reasonably priced and at times when stocks are insanely underpriced. It is ALWAYS investor emotion that is setting stock prices.
The benefit of looking at how prices are set rather than at bubbles is that it is something we can test far more effectively. Bubbles are a rare phenomenon. So it is hard to prove to skeptics that what you say about them is so. Even if your predictions prove out, it might be another 30 or 40 years before there is another bubble and you will be able to get a second bubble prediction right. Fama noted that he is not impressed by anything less than 10 correct predictions and Shiller noted that he will not live long enough to get 10 bubble predictions right.
Shiller WILL live long enough to get 10 valuation predictions right.