Set forth below is the text of a comment that I recently poster to another blog entry at this site:
Uh, oh Rob. Someone is on to you. Note the link someone gave to Shillers recent comments about how is still in the market and to not use CAPE for market timing. It seems there is a big whole in your boat and it is taking on water very quickly.
I haven’t read the Goon Central comments. But I’ve now read the article.
I disagree strongly with what Shiller is saying here.
I of course agree that the P/E10 value could go to 35. None of the research of the past 33 years tells us how high P/E10 can go. So he is 100 percent right re that one.
When he says “it’s not a clear signal yet,” he seems to be trying to use P/E1o to engage in short-term timing. ALL of the peer-reveiwed research (even pre-Shiller) tells us that that cannot possibly work. The idea that P/E10 can be used for short-term timing is just nuts. Shiller is of course right to reject the idea. But he should not need to say this. I know of not a single Valuation-Informed Indexer who has ever suggested in any way, shape or form that P/E10 can be used to engage in successful short-term timing.
He says “it’s not time to bail out.” It’s never time for the typical investor to bail out. Stock prices can always go higher, just as Shiller indicated in his other comments. So it makes sense for the typical investor to keep 25 to 30 percent of his portfolio in stocks even at times of insanely high valuations. Even if the P/E10 value went to 35, it would make sense for most investors to keep a small percentage of his portfolio in stocks. It could go up to 45. Or it could remain at 35 for a good amount of time.
There are VII strategies that call for some investors to go to zero stock allocations at specified P/E10 levels. I think those strategies make perfect sense. So I wouldn’t criticize anyone who elected to “bail out” at today’s prices. But I also would not criticize anyone who went with a 20 percent or 30 percent stock allocation at today’s prices. It’s a judgment call as to which way to play it. And of course all investors need to take their personal circumstances into account.
Shiller says that he is at 50 percent stocks and that younger people might want to go with even higher stock allocations. That is at complete variance with what he said shortly following the 2008 crash. He said then that it would not be safe to get back into stocks until the P/E10 had dropped below 10. Telling people that it is okay to go with a stock allocation of greater than 50 percent given where things stand today is exceedingly dangerous advice, in my assessment. I find this particular comment of Shiller’s shocking and even somewhat shameful.
The author of the article says that Shiller has said many times that P/E10 is not a good tool for timing the market. I follow these things closely and I am 99.999 percent sure that Shiller has never said that. He has certainly said that P/E10 cannot be used for short-term timing. There is zero evidence that it can be used for short-term timing. The peer-reviewed research that I co-authored with Wade Pfau shows that P/E10 has been an effective tool for long-term timing for 140 years now. If Shiller has ever said that P/E10 cannot be used for long-term timing, then he is wrong (according to the peer-reviewed research in this field). I don’t believe for two seconds that he has ever said this.
Shiller is saying dangerous stuff here. But nothing he says undermines the findings of the research that Wade and I produced together. The fact that the grandfather of VII would say such things publicly shows once again how imperative it is that the Ban on Honest Posting be lifted and that everyone affected by the economic crisis (and that’s all of us!) participate in a national debate on what the last 33 years of peer-reviewed research in this field tells us about how stock investing works.
Shiller doesn’t get it all. He’s in very good company re that one. He is a leader in this field. We all should be doing all that we can to see that he DOES get it all and that he helps us spread the word to the millions of middle-class investors who very much need to learn the realities.