I’ve posted Entry #205 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called An Easy and Convincing Way to Reconcile the Ideas of Shiller and Fama.
Juicy Excerpt: There are two possible explanations for why short-term timing does not work.
One is the one that Fama advanced. It could be that the market is efficient. That is, that all information bits affecting price are immediately incorporated into market prices. If this were so, all of the principles of the Buy-and-Hold Model (the model for understanding how stock investing works built on Fama’s research) would follow.
The other possible explanation is that the market is in the short term the farthest thing from efficient that is possible. If it were investor emotions that determine prices in the short term rather than economic realities and if economic realities became the dominant influence on prices only in the long term, short-term timing would not work. Emotions are irrational. Things that are irrational are unpredictable.
There’s a way to determine which of the two explanations is the right one. If the reason why short-term timing doesn’t work is that the market is efficient, long-term timing would not work either. But if the reason why short-term timing does not work is that it is investor emotions that determine short-term prices, then long-term timing would work.