I’ve posted Entry #280 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called It’s Not Possible for a New Understanding of How Stock Investing Works to Become Popular Until People Lose Confidence in the Old Understanding.
Juicy Excerpt: There’s no way to know for certain that Shiller is right. The historical data supports him. But data from earlier times can be dismissed on the grounds that the economic conditions under which that data was produced no longer apply. And the data from the time of Shiller’s finding until today is inconclusive. From 1981 forward, Buy-and-Hold has performed slightly better than Valuation-Informed Indexing. Valuation-Informed Indexers say that that’s because stock prices are high today; Valuation-Informed Indexing will be revealed as the superior strategy with the next price crash, which is inevitable according to the Shiller model. But that way of thinking about things begs the question — to say that Valuation-Informed Indexing will prove superior because today’s valuations will produce another crash is to say that Valuation-Informed Indexing will prove superior once again because Valuation-Informed Indexing has always been superior. The crash hasn’t come yet. So we don’t know for certain.
To be fair, the Buy-and-Holders are begging the question too. They say that we cannot know that another crash is coming soon because the market is efficient and returns are thus not predictable. All of the beliefs of those following both strategies follow from their core premises. If the market is efficient, Buy-and-Hold is the ideal strategy. If valuations affect long-term returns, Buy-and-Hold is dangerous.
I believe that I need to point that out to my Buy-and-Hold friends. I don’t want to hurt their feelings. I want them to consider what might happen to their retirement portfolios if it turns out that Shiller is right. I criticize their strategy not to upset them but to alert them to a new way of thinking about how stock investing works that I strongly believe we all need to know about.