I’ve posted Entry #380 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called If Shiller Is Right, Stock Gains Are Often Not a Good Thing.
Juicy Excerpt: Shiller revolutionized our understanding of how stock markets work because he showed that it is investor emotion that determines stock prices, not economic developments. If that is so, then upward movements in prices are not necessarily a good thing. They are a good thing when stocks are underpriced and when the upward movement thus pushes prices closer to fair-value levels, And then are a good thing when stocks are priced at fair-value levels and the upward movement is not more than the 6.5 percent real annual return that is justified by the economic realities. But upward price movements beyond that are not a good thing at all. Upward price movements beyond that hurt stock investors by making financial planning more difficult than it needs to be and by making our economic system less stable than it would otherwise be (price crashes cause recessions by dramatically reducing consumer buying power).
So price gains are not always a good thing. The best thing for stock investors would be if prices always remained somewhere near fair-value levels. Price gains that push prices well beyond fair-value levels are in fact a negative.
Well, since you have been sitting out of the market for a couple decades, you don’t have to worry about those “bad” gains.
No. That’s not even a tiny bit true, Anonymous. I have done what I could do to avoid the negative effects of the bad gains. But they have still hurt me in a very serious way.
Stocks were priced at the top of the bubble to provide an annualized long-term return of a negative 1 percent real. I bought IBonds paying 3.5 percent real. So I did good, right? In a way. But had stocks been selling at fair-value prices, I would have been able to purchase an asset class paying an annual return of 6.5 percent real. That would have been a whole big bunch better. That’s almost double the return. I have been hurt in a serious way. Just not as badly as my Buy-and-Hold friends have been hurt.
And of course I have been hurt by all the damage that has been done to our economic system and to our political system as the result of the continued promotion of the Buy-and-Hold strategy. My biggest fear is that the next price crash will push us into the Second Great Depression. How much good do you think my IBonds are going to do me if our economic system collapses or if our political system collapses? I would be willing to take far less in the way of return to be living in a society with a stable economic system and with a stable political system.
The bad gains hurt all of us. Buy-and-Hold is poison. Please don’t think that I am saying that it was intended to be poison. I don’t believe that. I believe that Buy-and-Hold was intended to be a positive. I believe that the vast majority of Buy-and-Holders believe to this day that it is a positive. But I don’t believe that. I believe that it is a huge negative. And I believe that I need to say what I sincerely believe when I post at discussion boards and blogs.
I believe that we all should be saying what we sincerely believe. That’s the American way. The learning experiences that develop when we all say what we sincerely believe enrich us all. I don’t believe that there should even by any controversy re the question as to whether we should all be permitted to post honestly or not.
There IS controversy. Mountains of it. I don’t deny the reality. But I view it as a highly unfortunate reality. I believe that every last one of us would be better off if we all pulled together to insure that the possibility of honest posting re the last 37 years of peer-reviewed research were opened up for every last one of us. My feeble human brain is not even able to imagine any possible downside.
The question that you are raising here is the question that makes Shiller’s 1981 research findings so “revolutionary” (his word). If the market were efficient, all gains would be rooted in economic realities and thus all gains would be good. But, if valuations affect long-term returns, as Shiller showed, then it must be investor emotion that causes stock price changes. If that’s so, then all gains not supported by the economic realities are bad gains, gains that hurt us all in the long run.
Shiller changed how we understand how stock investing works in a fundamental way. We used to believe that all stock market gains were good. Now, those of us who believe that his Nobel-prize-winning research is legitimate research know better.
My best wishes to you, dear friend.
Rob
“I bought IBonds paying 3.5 percent real.”
The only time I-bonds paid as much 3.5% real was between May and November 2000, when they paid 3.6%. There is no way you could have possibly sunk $400,000 in I-bonds in one year, or even two or three years. I-bond purchases have always been limited. So what gives?
Of course you’ll delete this. You casually toss off your boasts, then walk away when asked to explain the inconsistencies.
The WSJ reports forward P/Es are the lowest they’ve been in a while, around 16. Is it ok to get back in the market now according to your strategy?
The only time I-bonds paid as much 3.5% real was between May and November 2000, when they paid 3.6%. There is no way you could have possibly sunk $400,000 in I-bonds in one year, or even two or three years. I-bond purchases have always been limited. So what gives?
Of course you’ll delete this. You casually toss off your boasts, then walk away when asked to explain the inconsistencies.I also bought a lot of TIPS.
It’s not a boast. It’s what happened.
TIPS and IBonds paying 4 percent real were available to every investor at a time when stocks were priced to provide a long-term negative return. We should have been talking them up at every site on the internet, especially the ones where people were trying to learn how to put together effective Retire Early plans. I tried to share what I knew with my fellow community members and you Goons went on the attack. Lot of people were hurt in very serious ways as a result.
You should have permitted people to have the discussions they wanted to have and needed to have. And those of us who saw what you were doing should have spoken up. That would have been best for every single person involved, you Goons included.
My sincere take.
Rob
The WSJ reports forward P/Es are the lowest they’ve been in a while, around 16. Is it ok to get back in the market now according to your strategy?
That question is part of the debate that we should all be participating in at every discussion board and blog on the internet.
I personally use the current-day P/E10 as my valuation metric. When the current-day P/E10 is 16, stocks will be offering a very strong long-term value proposition, according to the peer-reviewed research in this field.
Rob