I’ve posted Entry #236 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called 20 Dangerous Investing Myths — Part Two.
Juicy Excerpt: Valuations Matter But Not All That Much. I have been developing and promoting the Shiller-based model (Valuation-Informed Indexing) for 13 years now. One change that I have seen over that time-period is that there used to be some Buy-and-Hold diehards who argued that the market really is efficient and that valuations thus have no effect. It’s rare to hear someone make that claim today (although Fama still says that he does not believe in bubbles). But while most today acknowledge that valuations matter, few are willing to acknowledge how much they matter according to the 140 years of historical return data available to us to study. SInce valuations is a huge factor and one entirely under the investor’s control (the investor cannot directly control valuations but he can determine their effect on his portfolio by changing his stock allocation in response to changes in valuations), I think it would be fair to say that understanding valuations is 80 percent of what it takes to be a successful long-term investor. It is hard to imagine how an investor who got the valuations aspect of the story right could do poorly in the long run and it is hard to imagine how an investor who got the valuations story wrong could do well in the long run.