Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
What is PE/10? Per you, it’s the “price of stocks”. What is the calculation based on? The S&P 500 index. VII’s timing mechanism is based on PE/10. It’s your justification for saying that stocks have been insanely overpriced since 1996. And who created PE/10? Shiller. All of this is undeniable fact. There is no VII without the S&P 500.
So why would Shiller go to all the work to create this vitally important metric based on an index that he says you shouldn’t invest in? Does he have a screw loose?
I wouldn’t go so far as to say that he has a screw loose. I obviously cannot speak for Shiller. My guess is that he might say that there is value in STUDYING the S&P500 to learn how stock investing works but that he sees a danger in having too big a percentage of the population investing in it.
I agree with you that “there is no VII without the S&P 500.” I see indexing as a great risk-reduction advance. You get the great returns associated with stocks but you avoid the risk of picking the wrong stocks. I see that as being a very big deal.
So I do see a bit of a contradiction in what Shiller is saying here. He did indeed create the VII concept. But he is suggesting here that people not reap the benefits of his advance. That’s one way of looking at it. I don’t see that as an unreasonable thing to say.
Could it be that Shiller just doesn’t himself see the benefit that comes from being able to predict long-term returns?
I am thinking that that might be the case. There certainly is other evidence that that is so. Perhaps he is just not yet aware of all of the implications of his amazing research findings. I am inclined to believe that that is the best explanation of the contradiction to which you are pointing.
There was something that John Walter Russell once said about me that always stuck with me. He said that I was good at asking questions. He said that there were numerous occasions where I would say something on the boards that would get people mad at me and he would think to himself: “Why is Rob making a big deal of this when it really doesn’t matter much?” Then, six months later, he would be researching some other point and something would turn up that would cause him to see the importance of the point that I was making. He would say to himself: “Oh! Now I see why he kept pushing on that point!”
It seems possible to me that something like that is going on with Shiller. You are right that he created P/E10 and that he essentially created Valuation-Informed Indexing. But I don’t think that he fully appreciated what he was creating. He was looking to solve particular puzzles that intrigued him at the time he did his research. But there were implications of his findings that did not occur to him at the time and that have not clicked for him in the years since. Those implications clicked for me because I was forced as the result of circumstances to think through some of this stuff in an in-depth way (because of all of the, um, good questions that you Goons so helpfully directed my way). So I took Shiller’s creation to places that he never intended to take it himself.
You won’t like that answer because it suggests that I did something positive. I obviously do believe that I did something positive. And I think that my explanation of Shiller’s comment makes some sense of the puzzle to which you are pointing. I don’t think he has a screw loose. Or, if he does, he just has a screw loose in the same way that all of us humans have a screw loose. We all see parts of the story and we all miss out on other parts. So Shiller is way ahead of us on some things and perhaps behind a lot of us re other things. And it’s the same with Bogle. And with me. And with you And with all of us. We all have something to offer but none of us can put the entire story together solely via our own brain power.
Remember when President Obama said: “You didn’t build that”? He got a lot of grief for that statement. And I think he may have merited a portion of that grief. But I also think that he was making a legitimate point that is often overlooked. There really are great people in this world who discover things or build things or create things that make life better for all of us and we should all appreciate their contributions. But it is also true that even these great figures had to rely on the help of lots of “little people” to do what they did. The greatest scientist in the world had a second-grade teacher who developed in him a love of learning that led to his breakthrough findings many years later. Individuals matter. But communities matter too.
Those are my thoughts, in any event. You certainly have pointed to an interesting puzzle.