Set forth below is the text of a comment that I recently posted to another blog entry at this site:
Perhaps you should ask Shiller as to why he is in the market.
Perhaps you should, Pink.
Am I the only person on the planet who cares to know how stock investing works? LOTS of people are capable of asking Shiller hard questions that very, very, very much need to be asked. And of course lots of people are capable of asking Bogle similar types of questions. And we all would be better off if those questions were being asked on a daily basis.
It’s not rude to ask those questions. It’s liberating. Bogle wants to help people. Ask those hard questions and he will be forced to come to terms with his contradictions and he may learn and then teach some truly amazing things. And of course the same is so with Shiller. And with many others.
Shiller contradicts himself in his public statements all the time (as does Bogle). I cannot make sense of all that he says because it is not possible to make sense of contradictions. Contradictions don’t reveal the truth but they point us in the direction of the truth. Look at Shiller’s contradictions, note the puzzles in them, ponder the puzzles, and you can learn some things. That’s the best that can be done with it. This is how we handle contradictions in every field other than stock investing and this is how we should be handling contradictions in the stock investing realm as well. I am sure.
Shiller said in early 2009 that it would not be safe to invest in stocks again until the P/E10 level dropped below 10. I recorded a RobCast on his comments. The P/E10 level has not yet dropped below 10. So Shiller contradicted himself when he recently said that he is going with a stock allocation of 50 percent and that he believes that an even higher stock allocation might make sense for some investors.
I’ll give you my take on what Shiller may be thinking. Please understand that I am not God. I do not see into the man’s mind. I have studied these matters for a long time and I think I have some clues to figuring out what is going on. But that’s as far as it goes.
I worked with Wade Pfau for a long time, as you know. Wade flipped to the Goon side. That’s a strange, strange, strange reality. So I have spent a lot of time going through his words and trying to figure out how he could justify doing such a thing. The threats obviously influenced him. But I don’t believe that Wade is evil. He couldn’t go along with the threats unless he somehow rationalized his behavior. There had to be something that persuaded him that it was okay to do what he did or he wouldn’t have done it. So to make sense of all this, we need to be trying to figure out what that something is.
Wade was a Buy-and-Holder when he first began working with me. I was a Buy-and-Holder myself when I first began exploring this stuff. John Walter Russell was a Buy-and-Holder when he first began working with me. So you have to start with that. Wade was very interested in the stuff I wrote at the Vanguard Diehards board. He wanted to explore my ideas in more depth. He wanted to do research checking on them. But his basic orientation was the orientation of a Buy-and-Holder. He was open to the idea that improvement on the Buy-and-Hold Model was possible. But he was confident that the model itself was generally good, generally on the right track.
As Wade did his research, he became more and more convinced that Valuation-Informed Indexing is the real thing. He declared at one point: “Yes, Virginia, Valuation-Informed Indexing works!” So what did he do with his personal stock allocation? He decided on his allocation when he was a Buy-and-Holder. Now he was a Valuation-Informed Indexer. The same stock allocation could not possibly make sense. So what did he do?
Wade wrote a post to the Bogleheads Forum announcing that he was lowering his stock allocation. I don’t recall the details. I believe that what he said was that he was going to drop to a 50 percent stock allocation. He didn’t say where he was before that but my guess is that he was at perhaps 70 percent stocks. So he was lowering his stock allocation by about 20 percentage points. Does that make sense?
It does and it doesn’t.
Going by pure logic, it makes no sense. A 70 percent stock allocation or even an 80 percent stock allocation makes sense under Buy-and-Hold. Under Valuation-Informed Indexing, something around 20 percent made sense at the time Wade advanced this post. 30 percent could work. Something in that neighborhood. He chose 50 percent, about the mid-point between what the two models recommend. Huh? He chose an allocation that doesn’t make sense under either model! Why?
He did it because he is one of the humans. He once believed in Buy-and-Hold. Now he believes in Valuation-Informed Indexing. But he doesn’t Believe with a capital “B”. He kinda sorta believes. The two models are opposites. It is hard to make that transition all at one time. What Wade really was doing was taking a step in the direction of a belief in VII without making the entire journey. What he said was: “Yes, Virginia, VII works!” What he should have said if he were capable of 100 percent self-awareness (none of us are) is: “Yes, Virginia, VII kinda, sorta works — I think!”
Wade is not 100 percent sure. He used to believe in BH. He has become convinced of the merits of VII. But it’s a big, scary leap and there are lots of smart and good people who believe in BH. So he hedges a bit. He goes back and forth. He is moving over time more and more in the direction of VII. But he doesn’t want to bet his entire life on it. So when you Goons threaten to destroy his career if he continues doing research in accord with the VII model, he tells himself that it is okay to back off a bit, to move just a wee bit back in the direction of BH. He is not really confident re EITHER model at this point. So he makes choices that are consistent with the premises of NEITHER model.
The logic for VII is solid. The research supporting it is solid. The potential to help us solve our economic problems is amazing. I should win every debate. But I have one big problem. VII is too darn good! If I had co-authored a study showing investors how to reduce the risk of stock investing by 10 percent, I would be the toast of the town today. Bogle would love me. Bernstein would love me. I would have 5o sites asking me to write columns. I would be interviewed everywhere. There would be zero hostility. Because every single investor alive can see how wonderful it would be to come up with something that permits investors to reduce risk by 10 percent.
Unfortunately, VII doesn’t do that. VII shows people how to reduce risk by 70 percent. Isn’t that seven times better than the thing that would make me the toast of the town? By logic, yes. But humans are not purely logical creatures. A 10 percent risk reduction is an obvious plus. A 70 percent risk reduction is scary.
There are all sorts of threatening thoughts that enter the picture when someone shows us how to reduce risk by 70 percent. Have I made a mistake in my retirement planning? Have I been a fool? Have I been taken? Are we at risk of going into the second great depression? You don’t have to worry about that stuff when you learn how to reduce risk by 10 percent, You do need to worry when you learn how to reduce risk by 70 percent. So some hate VII with a burning hate. That’s you Goons.
Some others are not capable of hating it with a burning hate. Some others are scared at how big the jump is. But they love learning so much that they are not capable of hating VII no matter how big an advance it represents. But their fears cause them to want to diminish the impact of the advance. So Wade announced that he was lowering his allocation not from 70 percent to 30 percent but from 70 percent to 50 percent. That’s as far as he was emotionally able to take it at that time.
I believe that something like that is going on with Shiller. He takes steps forward and then he takes steps back. He says amazing things and then he pulls back and evidences doubt about his own amazing insights. He says one day that it will not be safe to get back into stocks until the P/E10 level hits 10 and he says on another day that he is going with a 50 percent stock allocation at a time when the P/E10 is above 25.
It makes no logical sense.
Humans are not 100 percent logical creatures.
You are just going to have to accept that. That’s the over-riding reality here.
How can Wade and Shiller and Bogle and all the others come to feel more comfortable with what the last 33 years of peer-reviewed research has taught us. By talking about it.
There is no other way. That is how humans learn. That is how humans develop confidence to push an idea farther and farther and farther. We all need to talk about this stuff. On a daily basis. For a long time. Over time, we will get more comfortable and we will develop more confidence and we will resolve all the contradictions that trouble us today. It’s a process. A process that we have not yet given ourselves permission to begin.
Shiller doesn’t know everything, Pink.
Not anymore than Bogle does. Not anymore than Wade does. Not anymore than you do. Not anymore than I do.
He is one of the humans. That is the story. He gets some of them right and some of them wrong. He is doing the best that he can. Give him a freakin’ break.
We are all in the same boat. We are all killing ourselves by not giving ourselves permission to discuss the findings of the last 33 years of peer-reviewed academic research. Why have we prohibited honest discussion of the last 33 years of research? Not because investing is such a trivial matter that there is no need to worry about getting it right. We have banned honest posting because investing is so important a matter than we cannot bear the thought of having gotten it horribly, horribly wrong for so many years and for having ruined millions of middle-class lives (including our own!) by doing so.
We don’t have an intellectual difference of opinion here. What we have is an emotional freeze-up. We are the luckiest generation of investors that ever lived. But we cannot take the step we need to take to reap the benefits of the three decades of research because the very first step in the process is acknowledging that we didn’t always know it all. To think that we ruined all those lives is just unbearable to many of us.
The other side of the story is that we ruin more lives with every day that the Ban on Honest Posting continues. So we are going to have to have this painful discussion sooner or later. Given that we are going to have to have it sooner or later, it makes sense to have it when the pain is much less than what it will be following the next price crash. My take.
Shiller doesn’t know it all. That’s why he sometimes says stupid things, Pink.
Bogle doesn’t know it all either. That’s why Bogle sometimes says stupid things.
What’s true of Shiler and of Bogle is true for every last one of us.
It all changes when we agree to work together to learn how stock investing works in the real world. That’s what we all want to do deep down inside. That’s what we all need to start doing very soon. It’s hard for some of us to take that step today. But there is zero kindness in leading those who find it hard to believe that they can avoid this pain. All they can do is to delay the pain and thereby make it hurt 20 times more than it would hurt to endure the pain today.
That’s my sincere take re these terribly important matters in any event.
I naturally wish you all good things.