Set forth below is the text of a comment that I recently posted to another blog entry at this site:
Germany has to wipe out its stock market by invading Europe again and again, no? The future must repeat, right?
The thing that will repeat forever and ever are the core principles by which the stock market operates.
In every market other than the stock market, it is universally accepted that price matters and is always an important consideration. In the stock market, there was a time (1965 through 1981) when lots of smart people came to believe that the stock market was the lone exception, it was the one market where it wasn’t necessary for all participants to exercise price discipline for the market to function.
In 1981, we learned that the stock market ISN’T this huge exception to the rules that govern every other market. The stock market is just like all those other markets. Price matters. Price is by far the most important consideration.
Now it’s just a matter of getting the word out. Then we are all set.
The problem has not been that this stuff is not important enough to get right. The problem for 34 years now has been that this stuff is so darn important that we cannot bear to acknowledge ever having gotten it wrong. We have so far failed to take advantage of Shiller’s “revolutionary” (his word) finding because it just hurts too darn much to acknowledge the human misery we caused by making the mistake.
No one is saying that the U.S. market will always provide a long-term return of 6.5 percent real. It always has up until now. But, as you point out, Germany fell and we can fall too. That will change things in the United States. But it won’t change the basic principle established by Shiller’s research (and denied by many of the “experts” in this field to this day). Some other country will become the world’s superpower if the United States goes under. In that new country, valuations will be the most important factor that investors will need to consider when forming their investing strategies.
Shiller’s findings apply in all markets. Researchers use the U.S. dataset because the U.S. market has been a generally stable market for a long time. It is the best market to study to learn how stock investing works. Once you know that, you can take what you have learned and use it to invest in any market with the caveat that the other market is likely not going to be as stable as the U.S. market and thus you are taking on more risk to obtain whatever return you happen to obtain.