Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:
Investors overreacted to the banking crisis of 2008? Really?
Another joke of a column.
I wrote a full column explaining WHY I believe that investors overreacted, Sammy. You just engaged in put-downs.
If you don’t think that investors overreacted, why do you think prices moved so hard in the other direction in the following days? Did anything happen in the following days that could not have been anticipated all along as at least a reasonable possibility? I’m not able to point to anything shocking.
I acknowledge that things COULD have turned out much worse. I certainly don’t say that it was a lock that things would go as they did and that investors were thus being entirely irrational in assigning the prices they did. But, yes, I believe that, given the range of realistic possibilities, they overreacted and jumped to hasty and excessively negative conclusions that were then reversed in the following days.
And of course I believe that investors continue to evidence emotion to this day. I intend no personal dig by saying this but I believe that your comment evidences emotion. I think that everyone who writes or advises about investing should be looking for this sort of thing all the time and commenting on it when they see it.
I believe that most of the experts in this field don’t do that because they don’t see it as a good way to turn a buck. If someone tells you that you are reacting emotionally, you are less inclined to like him and thus less inclined to buy from him. But you are also left less able to invest effectively.
We need to know the realities to achieve our financial goals. The experts who flatter us are salesmen, not true experts. A true expert is someone who tells you what you need to hear even when it is not what you want to hear.
My take.
And my best and warmest wishes to you and yours regardless of whether we ever come to agree on these investing issue or not.
Rob
Anonymous says
“If you don’t think that investors overreacted, why do you think prices moved so hard in the other direction in the following days? Did anything happen in the following days that could not have been anticipated all along as at least a reasonable possibility?”
If you’d known that at the time, you’d have gone heavy into stocks and made a fortune, and Rodd and Todd would be going to Disneyland this year.
Anonymous says
And of course none of this matters because it’s the sophisticated Wall Street firms that set the prices. They’re not getting emotional. They’re making cold, hard, data driven calculations.
Rob says
If you’d known that at the time, you’d have gone heavy into stocks and made a fortune, and Rodd and Todd would be going to Disneyland this year.
I have a friend at church who happened to start a conversion with me about stocks at the time and I told him these things and he put more money into stocks and made a bunch in the run-up and then sold to lock in the gains. Good for him, you know?
There are things that I knew and there were things that I didn’t know. I knew that seeing a run-up in response to the overreaction was one scenario on the table. I ALSO knew that there were other plausible scenarios. One of the other plausible scenarios was that prices would continue downward until they went below 10 and only then start up again. That’s the scenario that Shiller was focused on when he advised investors not to get back into stocks until the P/E10 went below 10. I certainly don’t say that I knew at the time that he was wrong. I suspected that he MIGHT be wrong.
I am not revising history now when I know how things turned out. I was recording the 200 RobCasts that are stored at another section of this site at that time (I recorded all 200 of them in about a year from the onset of the 2008 crash). I start out most of those RobCasts by saying what the P/E10 level is. On all the ones recorded when it was around 13 or 14 or 15 or 16, I say that “Stocks are today selling at fair prices and stocks are a strong long-term value proposition when they sell at fair prices.” So I did indeed know. And I told. And anyone who listened to what I said and acted on it made a bunch of money as a result of doing so.
But I didn’t buy stocks at the time myself. I also knew that there were other plausible scenarios. Given my personal circumstances, the merit of buying heavily into stocks at a time when there was a good chance that we would see another 50 percent price drop was questionable. When the number reached “13,” the value proposition was so strong that I had a conversation with my wife suggesting we go from zero stocks to 30 percent stocks. She didn’t say “no” and she didn’t say “yes.” We planned to have another conversation about it in a few weeks and then prices started moving upward quickly. Events overtook us.
Of course we didn’t miss out on any opportunities as a result. The peer-reviewed research shows that there is never any need for investors to act quickly to grab hold of opportunities. There are always new opportunities to take advantage of what we now know about how stock investing works in the real world. I “missed out” on that big run up. But my friend from church got lucky on choosing his sell date. Short-term timing doesn’t work. He could have held too long. Or he could have sold too quickly. There’s no way of knowing how prices are going to go in the short term. So he didn’t tap into any great opportunity that I missed out on.
The opportunity that I came close to taking advantage of in early 2009 still exists. Stocks are priced today for a 65 percent price drop in the next year or two or three. I am 100 percent protected from the effects of that price drop because I have a zero stock allocation today. Stocks will be offering an AMAZING long-term value proposition following that price drop. I am positioned to take full advantage. I may end up doing BETTER than my friend my church in the long run.
Maybe not. But it could happen. Anyway, it hardly matters one way or the other. All those who considers price when buying stocks are likely to do so much better than the Buy-and-Holders that the differences between them are relatively trivial. The big distinction is between those who consider price when buying and those who do not.
That’s how things work, Anonymous. You don’t agree. That’s up to you. But that’s certainly what I believe. So I am certainly going to continue to say that. And it is not just personal opinion that I am putting forth. I am reporting what the last 35 years of peer-reviewed research in this field tells us. Nothing more, nothing less.
If you believed otherwise deep in your heart, you wouldn’t respond to my words with so much hate. Your anger reveals to all reasonable people that you have doubts about your own beliefs. The only way you can resolve those doubts is to talk things over with people who have enough affection for you to stand up to your brutality and tell you what they truly believe despite your abusiveness.
That’s how I have been playing it for 14 years now. That’s how I will continue to play it for 14 billion more years if I am given that much time. When I go, some other stubborn sort of fellow will rise up to take my place planting doubts in your dogmatic stock-investing brain. I am 100 percent sure.
Shiller addressed this question of why those who understand his research don’t make a quick killing in his book. If you would read the book carefully, you would not need to ask me these questions, you would know what the guy who was awarded a Nobel prize in Economics thinks about them. Buy-and-Holers are always worried about the short term because Buy-and-Hold trains them to take a short-term perspective on every question. Valuation-Informed Indexing is a strategy that only works in the long term.
That’s by design. We don’t claim that it works in the short term and so it is intellectually dishonest of you to continue expressing amazement each time you come across more evidence that it doesn’t work in the short term. Everyone who studies these matters knows that and has known it going back to the first day.
These are my sincere thoughts re these terribly important matters in any event. I naturally wish you the best of luck in all your future life endeavors, my good friend.
Rob
Rob says
And of course none of this matters because it’s the sophisticated Wall Street firms that set the prices. They’re not getting emotional. They’re making cold, hard, data driven calculations.
We disagree, Anonymous.
The sophisticated Wall Street firms take into consideration what the majority of investors believe in everything they do. They want to make money in the short term. If they didn’t care about the short term, they would be driven out of business by competitors. They are forced to consider what the majority of investors believe whether they like the idea or not. And most are probably fine with doing so, at least today.
I believe that there will be a change following the next price crash. I believe that at that time the Ban on Honest Posting will be removed and millions of ordinary investors will learn what the last 35 years of peer-reviewed research in this field says. The firms that you are speaking of will then of course take that into account in the decisions they make. And the textbooks used in the schools attended by the people who work at these fields will be updated to reflect the last 35 years of research. And so the Wall Street people will be more inclined to focus on the long term even when the majority of investors is not so inclined.
The fact that we are not there today does not tell us that we will never get there. Knowledge advances over time. The last 35 years of peer-reviewed research points to a very big advance.
And I don’t even a tiny bit agree with your claim that these Wall Street people are cold, calculating machines. They would like you to think that. They work hard to create that impression. The reality is that they are humans too and they have emotions like all the rest of us. They may well be better educated humans re this particular topic. But of course when the ideas in the textbooks they are working from were developed in an era prior to when the most important research was published, their educations count as a negative rather than a positive.
There is no such thing as a 100 percent emotion-free human.
That’s my sincere take in any event.
I naturally wish you all good things.
Rob