Set forth below is the text of a comment that I recently posted to another blog entry at this site:
Thanks for asking an intelligent question, Z.
You are right that the money is real for practical purposes in the short term.
This is an important fact. This is probably the single most important reason why so many smart and good people are taken in by Buy-and-Hold. It creates temporary wealth that is treated as real by banks and airlines and other institutions.
It never lasts. We have 33 years of peer-reviewed research based on 140 years of historical return data showing that. It’s not real.
I am telling you what the peer-reviewed research shows us. If you don’t want to believe it, you are of course free to believe whatever you prefer to believe. I am not free to lie about this matter. It would be fraud for me to do so. I am going to continue posting honestly. I don’t dare to consider the possibility of playing it any other way.
Yale Economic Professor Robert Shiller was awarded a Nobel Prize for his work in this area. You don’t receive a Nobel Prize for repeating the conventional wisdom. Shiller taught us something very important and very new. Shiller’s work has far-reaching implications. All of my work explores those implications.
There are thousands of economists who would like to be exploring these implications and writing about what they come up with on a daily basis. They do not feel free to do so because the Buy-and-Holders will destroy their careers if they do so. This is going to have to change. We are headed to a dark place if we do not make this change soon.
I believe that we will make the change following the next price crash. Once we do that, the problem will go away. Once investors know what the research says, most will be happy to take into consideration the findings of the past 33 years. Once most investors are taking those findings into consideration, there will never again be insane overvaluation. It’s just not something that we will ever again need to worry about. It’s crazy to have the amount of your accumulated life savings jumping all around. We all should be happy that the days in which we need to endure such nonsense are in the process of coming to an end.
The fact that as a society we have not been able to accept what the research says or even permit open discussion of what the research says does not suggest that these findings are unimportant. The reality is entirely to the contrary. It shows that we understand on some level of consciousness that these findings are of HUGE importance. It is because they are so important that they are so disconcerting to the millions of people who built their retirement plans pursuant to the very different findings of preceding years.
The people who owned stocks in early 1929 were able to buy things that they were not able to afford in late 1929 because of one of our earlier experiences with the wonders of Buy-and-Hold strategies. The banks and airlines accepted those portfolio values at face value for a time. But then, when the Pretend Money disappeared, the value assigned those portfolios changed in a dramatic way. That’s the way it works. That’s what we have up ahead of us again when we experience the next price crash.
Stock crashes are a horrible, horrible thing. We all should want them to be brought to an end. Shiller showed us how to do that. To bring stock crashes and the economic crises that inevitably follow them to an end, we need to stop encouraging people to believe in the Pretend Money. We need to do just the opposite. We need to DISCOURAGE belief in the Pretend Money. We don’t want to ban honest posting re the past 33 years of peer-reviewd research, we want to ENCOURAGE honest posting about the past 33 years of peer-reviewed research. It is by being exposed to honest posting re the peer-reviewed research that we all advance in our understanding of how stock investing works.
We are the luckiest generation of investors ever to walk Planet Earth. Why? Because we are the first generation to have the last 33 years of peer-reviwed research, the research that puts the final puzzle piece into place, available to us. I think we should be taking advantage of our good fortune rather than pissing it away.
It makes you happy to have banks and airlines recognize Pretend Money. Why? How does it help you to have that money credited to you ONLY FOR A SHORT TIME. It is my belief that that hurts you. If you knew the true value of your portfolio, you could plan your financial future far more effectively. I see no benefit to being tricked. Which is what is happening if you come for a time to believe that Pretend Money is real. If short-term timing worked, you could cash out just at the right moment. But it doesn’t. So how does this fantasy belief help you?
What do you think it means to say “valuations affect long-term returns” if it does not mean that a portion of investors’ current portfolio value is Pretend Money? My feeble brain is not able to come up with any other way to interpret the statement. If your far superior Goon brain is able to come up with something, I would sure like to hear about it.
We once thought that stock returns were random. That’s why they named the famous book “A Random Walk Down Wall Street.” Then Shiller showed that valuations affect long-term returns. That means that long-term return are NOT random. Shiller’s research changed our fundamental beliefs about how stock investing works in a “revolutionary” (his word) way. We all need to recognize that and to begin reaping the benefits that follow.
That’s my sincere take re these terribly important matters, in any event.
I wish you all the best that this life has to offer a person.