I’ve posted Entry #271 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called A Story From My Own Life That Shows the Power of the Self-Deception That Also Causes Stock Booms and Crashes.
Juicy Excerpt: I even have a particular reason for taking diabetes seriously. I had an uncle who had to have his legs cut off because he failed to change his diet after being diagnosed. I remember thinking as a teenager how horrible this was. It’s bad enough to lose one’s legs. But to lose them because you didn’t take an action that you knew was needed to prevent the loss — that’s doubly horrible. My uncle — one of the self-deluded humans — did that. Knowing what happened to him as a result of his delusions, I walked a good ways down that same path over the past two years. I’m a mess!
We all are.
That’s the point of Shiller’s “revolutionary” (his word) finding of 1981 that valuations affect long-term returns. If Shiller is right (there is now a mountain of evidence showing that he is), the mis-pricing of stocks is a real phenomenon. When stock prices rise to the levels that they rose to in the late 1990s, we are borrowing from our future selves and we have to pay the money back in years to come.