Set forth below is the text of a comment that I recently posted to another blog entry at this site:
Because once a pattern is recognized
What Shiller did in 1981 was something much, much bigger than recognizing a pattern. He showed that the core idea on which the entire Buy-and-Hold Model was built was in error.
The default belief is not that prices do not matter. The default belief is that prices DO matter. Prices matter with every good and service we buy. The puzzle here is — Why did so many smart people come to believe that price does not matter when buying stocks?
Many smart people came to believe this because in the early years of our investigations into how stock investing works (there were few serious investigations prior to the 1960s), a man named Eugene Fama made a startling discovery. Fama’s discovery was very important. He won a Nobel Prize for it. But Fama’s description of what he had discovered was tragically flawed.
Fama found that short-term timing (changing one’s stock allocation with the expectation of seeing a benefit for doing so within a year or so) does not work. All of the research done in the 50 years since supports Fama’s finding. It is the second most important finding in the history of investing analysis.
Unfortunately, Fama described the finding improperly. He did not say: “The data shows that short-term timing doesn’t work.” He said: “The data shows that timing doesn’t work.” The first statement is true and important. The second statement is wrong and dangerous. The second statement has caused millions of people to lose their jobs and has put millions of people on track to suffering failed retirements and has caused hundreds of thousands of business to fail and has caused numerous discussion boards and blogs to be burned to the ground or to be ethically compromised. The second statement will in days to come be responsible for having put a good number of friends of mine in prison cells.
The second statement is as false as any statement could ever be false. Shiller was the first person to test whether long-term timing (changing your stock allocation in response to a big shift in valuations with the understanding that you may not see benefits for doing so for as long as 10 years) works or not. Shiller found that long-term timing ALWAYS works and is ALWAYS 100 percent required for any investor hoping to have any realistic hope whatsoever of long-term investing success.
The false statement needs to be corrected. That’s what this 12-year saga is all about. No one can talk intelligently and honestly about how stock investing works according to the peer-reviewed research in this field until that statement has been corrected.
Fama did not discover a pattern showing that long-term timing doesn’t work. Fama didn’t discover ANYTHING about long-term timing because he never bothered to test whether long-term timing works or not or whether long-term timing is required or not.
Shiller did not find a pattern different than the pattern Fama found. Fama had never found any pattern relating to long-term timing because he never looked at the phenomenon. Shiller found the only pattern that has ever been found relating to long-term timing — he found that it always works and that it is always 100 percent required. Every researcher who has done follow-up work has found precisely the same thing.
There is no conflict in findings here. ALL of the data shows that short-term timing doesn’t work and ALL of the data shows that long-term timing ALWAYS works and is ALWAYS 100 percent required. Common sense of course tells us the same thing. ALL of the data confirms what our common sense tells us MUST be so.
The problem is that flawed human beings built their careers around an investing strategy that was developed before all the research that was required to know what works had been completed. These flawed human beings need to be encouraged to work up the courage to say the words “I” and “Was” and “Wrong” and thereby to permit themselves to spend the remainder of their lives doing good work rather than destroying millions of lives by refusing to acknowledge a very, very, very big error about a very, very, very important matter.
This is not about patterns. This is about saving the U.S. economic system from collapse as the result of an error made by our Buy-and-Hold friends nearly 50 years ago and uncovered by the peer-reviewed research in this field 33 years ago.
My best and warmest wishes to all of my soon-to-be-prison-dwelling Goon friends.