I’ve posted Entry #330 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Two Ways That Bogle Could Have Reacted to Shiller’s Research Without Admitting a Mistake.
Juicy Excerpt: It was easy to rationalize not incorporating Shiller’s findings into one’s investing strategy in 1981; stock prices were at rock-bottom prices — the thinking no doubt was that this was a “no harm/no foul” situation. The potential harm grew larger as prices rose throughout the 1990s. But then so did the embarrassment that would result from suddenly coming clean. It is a lot easier to own up to a mistake within a few weeks of when it is discovered than it is to do so several decades down the line. The price crash and economic crisis of 2008 of course made it more imperative than ever that the Buy-and-Holders come clean while also making their psychological need to avoid doing so all the more pressing at the same time.
It’s been 35 years now. Everyone who works in this field understands on some level of consciousness that the most important question before investors today is the question of how much they should adjust their stock allocations in response to valuation shifts. And yet very few address themselves to this question in a serious way. Discussing the implications of Shiller’s findings has become socially taboo. Holding open debate on these critically important matters opens too big a can of worms. Doing so might help us avoid future economic crises. But how do we explain to ourselves our failure to not take advantage of what we learned in 1981 to avoid the last one?