I have posted Entry #180 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s titled Should We Assume That Stock Prices Are Predictable If There Is No Evidence Otherwise?
Juicy Excerpt: Markets depend on price discipline to function. It is because the person buying a car is trying to push the sales price down while the person selling the car is trying to push the sales price up that the car market is able to do a good job at setting the prices of cars roughly where they should be. When large numbers of investors come to believe that Buy-and-Hold strategies can work, price discipline disappears from the stock market and the market becomes dysfunctional. Eventually, prices rise so far from where they would be if market participants were practicing price discipline that the only way the market can continue to function is for prices to crash.
That all follows, doesn’t it?
I believe that it is this failure to research long-term timing that explains why two people as smart as Eugene Fama and Robert Shiller could come to opposite conclusions on the question of how stock investing works. Fama concluded that the market is efficient before Shiller published his research showing that long-term timing always works. Fama has tuned out Shiller’s findings for 32 years now because in his mind timing is out of the question. Had Shiller published his findings first, Fama would have put his mental energies to the task of developing a model to explain how stock investing works with the thought that price discipline is essential firmly established. Because of a quirk of historical timing, he instead came to the project with an entirely inappropriate hostility to research-based showings of the importance of one form of market timing.