Set forth below is the text of a comment that I recently posted to a thread at the www.SiteSell.com forum:
Super post, Rob…
You obviously know your stuff. Your paper about Shiller’s paper is spot-on. It’s an excellent indicator and folks SHOULD be worried about the high CAPE of the current market.
I don’t think that paper was trying to deliver an optimized approach, merely prove the value of CAPE as a predictor of value, which is what drives the long-term future.
So they should definitely “TAKE” your contribution for the valuable information that it contained. It’s the only reason that I spent so much time and space addressing “active” investing before I was planning to do so.
Please, Rob, keep posting!
I obviously see a crash coming. But those following a Permanent Portfolio strategy won’t be hurt by it much, if at all. They are protected by the low stock allocation. A 70 percent crash will wipe out those going with a conventional Buy-and-Hold strategy. But those going with a PP strategy will suffer only a 17 percent loss of their portfolio value. And gold will likely skyrocket in such a scenario. So they may well end up ahead.
I have a question for you, if you are willing to entertain it. Are you planning to go beyond the SiteSell community with this project? I’m not trying to put you on the spot. Please feel free to just say that you have no particular plans. There are two reasons why I ask: (1) I think this project is very important; and (2) I think you are going to run into roadblocks if you try to take it outside SiteSell (though I sure would love to see you try). I agree with you completely re the power of what Harry Browne put forward. What pains me is that it has not caught on despite the compelling track record. That troubles me a lot. I would sure like to see someone bust through the roadblocks.
I’ll offer a few comments re Eugene Fama in an effort to help you and others perhaps gain a better understanding of where I am coming from in my contributions.
I gave a talk about this stuff at the Financial Bloggers Conference held last October. Shiller won the Nobel Prize in Economics the day before the conference began and I mentioned that in my talk. Several people came up to me afterwards and said that, if they were me, they would be using that to help market the Valuation-Informed Indexing concept. Being able to say that the grandfather of the concept had won the Nobel Prize would seem to be a huge plus in getting people aboard!
I knew that it wasn’t going to make much difference (and it hasn’t). The intellectual case has been so strong for so long a time that there’s just no need to add to it. There is something else that is holding things back. I see it as my job to figure out what that something is.
There was a very weird thing about the awarding of that Nobel Prize. Fama (the guy responsible for the Efficient Market Theory, which is the intellectual construct behind the conventional Buy-and-Hold concept) was ALSO awarded the Nobel Prize on the same day. All of the reports on this pointed out the oddity of this. Shiller and Fama have opposite views on how stock investing works. It is not even remotely possible that they could both be right. So why would they both be awarded the highest honor possible for their work?
I write a weekly column on Valuation-Informed Indexing that appears at the http://www.ValueWalk.com site. I did research on this for a series of columns I am posting there. I looked at all the commentary on the awarding of last year’s Nobel Prize in Economics to see what lots of experts think of this strange phenomenon. The things that I read about Fama were just knock-your-socks-off weird. I tend to focus a lot on puzzles. When I see something that doesn’t seem to make sense, I dig and dig, trying to make sense of the apparent puzzle. So I spent a lot of time thinking about the contradictory things that numerous people said about Fama.
Lots of smart people give Fama very high grades for the quality of his research. There’s too much praise there for it not to be real, in my assessment. Fama is a smart guy who has made important contributions. I am sure of this.
But then there is this other line of comment. There were numerous blog entries in which well-regarded economists were just about laughing out loud about something that Fama says all the time. Fama says that there is no such thing as a price bubble. He is adamant about this. And even people who think the world of him think he sounds silly when he makes the claim. Everyone acknowledges that there are bubbles today. Why does the fellow who started the idea of rooting investing strategies in research refuse to acknowledge this?
It’s because he has intellectual integrity.
If the market is efficient (the entire Buy-and-Hold Model is rooted in a belief that it is), there can NOT be bubbles. Fama refuses to give on this point because he understands better than most that the entire Buy-and-Hold Model collapses intellectually once we acknowledge that there are bubbles. He is sticking to this claim to the point where it makes him look silly because all the marbles are riding on it.
The point that I am getting at here is that the question of whether Buy-and-Hold works or not is a yes/no question. It cannot be that it kinda sorta works and kinda sorta does not work. If it works, it explains the market correctly and has great value. If it does not work, it misleads us as to how the market works and it is very dangerous.
I believe that I know what caused Fama to make his mistake. The idea that the market is efficient (and thus prices stocks properly) is rooted in a belief that investors act in their self-interest. This certainly seems like a plausible belief. Participants in other markets act in their self-interest. For example, my experience is that the used-car market is highly efficient. When you see price differences for different used cars, there is almost always a good reason. The prices asked for used cars are almost never crazy. There is almost always an identifiable logic at work in the setting of prices in the used-car market, in my experience.
Why would the stock market be different?
It’s because the thing that makes it possible for market participants to act in their self-interest is INFORMATION. The easy availability of information is the thing that permits markets to work their magic.
You would think that information would be freely available to participants in the stock market. But it is not. My calculator (The Stock-Return Predictor) is a basic tool. Some version of that calculator should be available at every investing site. I have had enough people tell me this that I don’t think I am fooling myself about the importance of the calculator. But the reality is that my calculator is the only one that does what it does and that there are very few links to it on the internet. I have had numerous sites ban me when I try to share this information. I have had site owners send me e-mails telling me that they think my site is the best site on the internet on investing and then ban me from their sites! I am not kidding. I have had people apologize for banning me and then explain that they think that my work has huge value but that they believe that if they permit me to post at their sites the things I say will drive their customers away. MANY people have delivered this message to me in one form or another.
We do not have easy availability of the information needed to invest effectively available to us today. There are niche sites that offer great information. But none of the big sites offer good information. That means that the vast majority of investors cannot possibly act in their self-interest when making investing decisions. They do not have easy access to the information needed to do so. So the stock market does not function like other markets. It is today dysfunctional.
This explains the puzzle. Fama is right in theory. He is wrong in practice. He is wrong because he forgot that part of the definition of what makes a market is that there be easy access to the information needed to act in one’s self interest. The stock market is not really a market yet. It is something less than that and something that operates according to different rules than functioning markets.
The relevance to the Permanent Portfolio is that this explains why Harry Browne’s ideas have not caught on despite their logical power and impressive track record. My focus is on changing this. I want everyone to know about the need to shift from the conventional Buy-and-Hold approach to something like the Permanent Portfolio concept. It’s of course a good thing if the people here at this forum do so. Every little bit helps. But I am wondering if the reason why you are putting so much effort into this project is that you have bigger ideas for it down the road a bit. I obviously have a strong belief that we need to have people with influence pushing things like this so that we can reach a point where the stock market is actually operating in the manner in which Fama has properly informed us it should work (while improperly theorizing that it already does).
Thanks again for your kind feedback. I have taken a lot of body blows putting this stuff forward. You have offered me some warm encouragement and that makes a big difference.