Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
You say that Wade Pfau learned from you and that you have gone deeper than Shiller. Both earning a good living from the investment field/careers. Why haven’t you?
I am Public Enemy #1 of the Buy-and-Holders. I don’t pull punches. I say exactly what I believe. And, since I believe that the last 36 years of peer-reviewed research is legitimate research, what I believe is rarely in accord with what my Buy-and-Hold friends believe (although I of course have the greatest respect possible for them).
Shiller has made amazing contributions. But he pulls his punches.
Pfau had made amazing contributions. But he pulls his punches.
Each time someone pulls a punch, he makes it harder for all the rest of us. The only way out of this mess is for every single person involved to say exactly what he or she believes. It’s through the interactions of people who believe very different things that we all learn together. I would not want any Buy-and-Holder to pull his punches in his dealings with me. I learn more when my Buy-and-Hold friends say exactly what they believe. I return the favor to my Buy-and-Hold friends by saying exactly what I believe in my interactions with them. I wouldn’t dream of showing them the disrespect of failing to do so.
It’s a career limiting move in the short term. The Buy-and-Holders are in the majority and they have the power to shut me down today. But I think that my approach will prove to be a gangbusters success in the long run. I have learned mountains of stuff that I would not have learned if I were not always pushing myself to the next stage of understanding. You can’t push yourself to the next stage of understanding for so long as you are pulling your punches. If I were to pull my punches, I would be selling myself out. And that means that I would be selling my readers out too. And of course ultimately it means that I would be selling my Buy-and-Hold friends out as well. Not this boy, you know?
I am seen as more of a threat than Shiller and Pfau. I would like to see them become bolder. If my Buy-and-Hold friends were thinking clearly, they would want them to become bolder too. We don’t learn when everyone tells us how great we are. We learn when our sincere views are challenged in vigorous and civil and reasoned debate.
That’s my sincere take re these terribly important matters, in any event.
Rob
Here’s some new research, which you claim to always be interested in. The “fair-value CAPE”:
https://investornews.vanguard/valuing-the-stock-market-with-a-new-yardstick-the-fair-value-cape/
“As the figure below illustrates, the Shiller CAPE (cyclically adjusted price-to-earnings) ratio provided a fairly accurately forecast of 10-year-ahead returns—for a while. Since the mid-1990s, however, the predictive power of this metric has deteriorated.”
Specifically, the chart shows that Shiller’s results fall apart starting in 1996. Seems like that’s a significant year, but I can’t remember why. Anyway, the fair-value CAPE, which has smoked Shiller since then, is not predicting a crash. It says only that the market is somewhat overvalued.
Good news, right? You’re not really hoping for a crash are you? That would be ghoulish.
Good news and bad news Rob. It looks like a crash is coming, but not immediately, nor is it likely to be a 65% drop.
https://www.cnbc.com/2018/03/08/jp-morgan-co-president-warns-of-deep-correction-for-stocks-totaling-as-much-as-40-percent.html
I guess you won’t get that New York Times article or the $500 million for falling short.
Here’s some new research, which you claim to always be interested in. The “fair-value CAPE”:
Thanks for the link.
The predictive value of the metric has deteriorated for a time because the insane level of mispricing which came into effect in 1996 has not yet resolved itself. Assume that stocks return to fair-value prices tomorrow and re-run the numbers and you will obtain very, very different results.
If stock prices are determined by a rational process, then there is no need to re-run the numbers. But, if stock prices are determined primarily by shifts in investor emotion, then it is absolutely imperative to do this. So the core question is — Are stock prices determined by economic realities or by shifts in investor emotion?
The way to test this is to check whether prices fall in the pattern of a random walk or not. If prices fall in the pattern of a random walk, it is reasonable to conclude that it is economic realities that are causing price changes. And, in the short term, we do indeed see a random walk. But in the long term, we do not see a random walk. In the long term, valuations affect long-term returns. Why? Because it is investor emotions that determine returns and valuations measure the extent of investor emotion present at various points of time. That’s what Shiller showed with his “revolutionary” (his word), Nobel-prize-winning research of 1981.
It would be very, very, very good news if there were a way to avoid another crash. I will certainly give you that one. If if it true that valuations affect long-term returns, the only way to avoid crashes is to educate investors as to the realities we have learned over the past 37 years. Stock prices are self-regulating so long as honest posting is permitted at every internet site. High prices equal low long-term returns and investors who are aware that long-term returns are going to be low sell stocks, which brings prices back to reasonable levels. Stock markets in which investors are not able to learn what the last 37 years of peer-reviewed research teaches us are runaway trains. It is price discipline that keeps markets functioning properly. Buy-and-Holders rule out any possibility of ever exercising price discipline when they make their first stock purchase. Not good (if the last 37 years of peer-reviewed research is legitimate research, which I believe it to be).
Ghoulish (But Only If Buy-and-Hold Remains Unchallenged for Too Much Longer) Rob
I guess you won’t get that New York Times article or the $500 million for falling short.
Life is so unfair!
Long-Suffering Rob
I keep a list of possible column topics so that I always have ideas when I go to write new ones. I added the topic of the Vanguard study you linked to above to the list.
When I write the column, my aim will be to note both the positive and negative aspects of the study. I will of course be giving my perspective. My perspective is obviously not identical to the perspective of Bogle or Shiller or you or anyone else. The column has my name on it. So it offers my perspective.
Let’s say that I say some things critical of the Vanguard analysis, things that might cause some readers to lose confidence in its conclusions. Do you see that as a good thing or a bad thing?
I see it as a very, very good thing.
It could be that I would be right in what I said. In that event, it would be a good thing for people to lose confidence in the Vanguard analysis.
It could be that I would be wrong in what I said. In that event, people will see that I am wrong and belief in the Vanguard analysis will properly be stronger than it otherwise would have been because it was able to survive a challenge.
Yes?
Rob
“Let’s say that I say some things critical of the Vanguard analysis”
Oh, you will. I could write that column for you. You’ll quibble about the meaning of “fair-value” (who is this guy to decide what’s fair??) You’ll say interest rates and inflation are just meaningless noise. You’ll point out that the writer doesn’t have a Nobel prize. In the end you’ll dismiss the Vanguard article as simply wrong. And if someone asks you for a single piece of actual data to support that conclusion, you’ll say that the whole world is your data, that it’s just common sense, and that he is a prison-bound Goon.
Done. You’re welcome.
I don’t think that you are being even a tiny bit fair with that comment. But say that you were. Say that everything you are saying was 100 percent on point. It would still be better for you to let me say it. Then people would see the flaws in my argument and your side would win the day.
This is my sincere take re this terribly important matter, in any event.
Rob
“I don’t think that you are being even a tiny bit fair with that comment. But say that you were. Say that everything you are saying was 100 percent on point. It would still be better for you to let me say it. Then people would see the flaws in my argument and your side would win the day.
This is my sincere take re this terribly important matter, in any event.”
Hahahahaha…..you were likely to respond the way he described and now you can’t without looking ridiculous. By the way, people have already seen the flaws in your arguments and you “lost the day” a long time ago.
It’s possible that I will mention the thing about the Nobel prize. I see that as a big deal. When we award someone a Nobel prize, that’s our entire society delivering a message.
We are as a society delivering a mixed message today, I will give you that much. We have awarded a man a Nobel prize for showing that valuations affect long-term returns and for thereby enriching all of our lives in hundreds of important ways and we have also banned honest posting on the many far-reaching implications of that man’s work at every large investing discussion board and blog on the internet. There’s a contradiction there.
I think we will work it out. I think this is a process that we need to work through to obtain the benefits of the last 37 years of peer-reviewed research for ourselves and for our children and for our children’s children. I think we live in a good country filled with good people and I think that we will make it together to the other side of The Big Black Mountain all in one piece (with perhaps some nasty-looking scars that we can point to when telling the story to future generations).
We’ll see, you know?
I certainly wish you the best of luck with it in any event, my dear Goon friend.
Process-Oriented Rob
“You say that Wade Pfau learned from you and that you have gone deeper than Shiller. Both earning a good living from the investment field/careers. Why haven’t you?”
You really haven’t responded to this question. Care to try again?
I represent more of a threat to the Buy-and-Holders.
Plain-Speaking Rob