Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Shiller is interviewed in this week’s Barrons. Does he finally warn people to get out? Um, no. In fact the title of the article is “Who Says This Stock Market Is Overpriced?”
Barrons: Is it time, then, to discard the CAPE as a predictive tool?
Shiller: Well, I wouldn’t. It may yet do that [be correct].
And that is as strongly as he defends the metric that has guided your investing strategy for the last 21 years. And Shiller’s personal investments?
“I still have U.S. stocks…I have European and emerging markets stocks, and not much fixed income. I have some real estate funds and REITs outside the U.S.”
Not much fixed income means he is mostly in stocks. When PE10 is insanely high. Any comment, Rob? Are the goons forcing him to buy stocks?
I have several comments.
My first comment is “thanks for bringing this to our attention.
Shiller is the founder of Valuation-Informed Indexing. He has never used that word. It is my word. I noticed back in 2002 that neither Shiller nor anyone else had ever explored in depth the many far-reaching implications that follow from his “revolutionary” (that’s Shiller’s word) research findings of 1981. I needed a name to apply to the investing model that logically follows from a belief in Shiller’s work and I came up with the name “Valuation-Informed Indexing.” Shiller himself rarely explores the practical how-to-invest implications of his work. He sticks to theory in his formal writings. He sometimes touches on the how-to-invest implications in interviews but almost always only in a vague and unsatisfying way and he frequently says things in one interview that conflict with things he has said in other interviews. I cannot claim full credit for Valuation-Informed Indexing because it is Shiller’s work that drives the machine but Shiller cannot be said to have endorsed the many things that I say follow from his Nobel-prize-winning work because he has not put his name to my explorations of the implications of his work.
So my first comment is to say “thank you” on behalf of the millions of middle-class investors who I believe should be trying to learn more about how stock investing really works in the real world. We all need to know more about what Shiller thinks re these matters and you Goons often bring to my attention things that he has said that I would otherwise not know about. You are helping me when you do that and you are helping investors who read the words at this site either now or after the next crash when you do that. I am grateful.
Shiller doesn’t disown Valuation-Informed Indexing in the words that you quote. He doesn’t say that anything that I have said is wrong. His words are consistent with my words. But I think it is 100 percent fair of you to suggest that he is showing a distinct lack of enthusiasm for the Valuation-Informed Indexing concept (a concept rooted in his own Nobel-prize-winning research) in the words that you quote. It is an exceedingly odd phenomenon.
My take is that Shiller has lots of experience with the anger that is provoked in Buy-and-Holders when they hear about what the last 36 years of peer-reviewed research tells us about how stock investing works in the real world and that he tries hard to steer clear of advancing comments that will cause that anger to be directed to him. That’s what I believe, Anonymous. I see it as a 100 percent human reaction. No one likes to have other people angry at him. No one likes to have other people calling him names. No one likes to see other people experience pain and angst and unhappiness. Shiller is responding in a human way to a situation that he did not create, to a situation that he was placed in as a result of the circumstances of his life. He discovered some amazing stuff about how stock investing works and the implications of what he has discovered upset lots of people in a very big way and his response has been to hold back on offering clear comments on the many far-reaching implications of his work.
I believe that it is unfortunate that Shiller has acted in this way. I would like to see him respond in more forthright ways. If he showed leadership in this regard, lots of others would feel emboldened to follow the path he pioneered. When Shiller speaks in a tentative way, others who see value in his work follow his lead and speak in a tentative way as well. The result is that knowledge of and belief in the Valuation-Informed Indexing model grows more slowly than it would were Shiller leading the charge into battle every day. That hurts each and every one of us, Buy-and-Holders and Valuation-Informed Indexers alike, in my assessment.
It is of course correct to say that P/E10 may prove to be a predictive tool yet once again, just as it has proven to be a predictive tool for 147 years running now. So Shiller’s comment is of course correct. But it is an awfully defensive way to make the point. If I were asked that question, I would ask back in response why anyone would think that it might NOT prove to be a predictive tool yet once again. It appears that there was some discussion that came before the words you quote in which it was noted that we have not yet seen a drop to fair-value P/E10 levels and that we have been at super-high P/E10 levels for longer than any earlier time in history. That much is so and that’s an important point to raise in an interview with Shiller. He DOES need to be asked to explain that — it is a good reason for having doubts about Valuation-Informed Indexing. But I think that I could make a much more powerful case in favor of Valuation-Informed Indexing than Shiller offered here.
The point that is evaded in the interchange is that stocks have also not in recent years behaved in accord with how the Buy-and-Hold model says they should behave. The annualized real return for stocks from January 2000 through December 2016 was 2.25 percent real. Huh? There is not one Buy-and-Holder alive who would have predicted that if you asked him in January 2000 what sort of return he thought we would see from stocks for the next 17 years. Something very, very, odd is going on in the market in recent years and it is the most important public policy issue before us as a nation today to figure out what it is.
It COULD be that Valuation-Informed Indexing does not work. I don’t believe that and Shiller doesn’t believe that. But neither of us can see the future and neither of us are incapable of errors in judgment. So that COULD be the case. But it also could be the case that Buy-and-Hold is in error. That in fact MUST be the case if Valuation-Informed Indexing is not in error; the two models for understanding how stock investing works cannot be reconciled — it is a logical impossibility that they are both correct. There is a certain charm in the humble way in which Shiller makes his case, I will give him that much. But as the fellow who performed the research that discredited the Buy-and-Hold Model (if it is valid, as I believe it to be), it is Shiller’s JOB to make the strongest case possible for the new model (while also being charitable to those who continue to believe in the model that he discredited and while also acknowledging his own human imperfections and noting that there are developments that have taken place that justify SOME doubt about the Valuation-Informed Indexing project, to be sure).
I am not able to say precisely what Shiller would say re these matters if he felt no pressure to avoid provoking Buy-and-Holders by speaking plainly. I think he would be much stronger in the case he makes for Valuation-Informed Indexing and for the failure of the Buy-and-Hold Model if he did not feel such pressures. But I also think that it is possible that he is experiencing a measure of cognitive dissonance, as Bogle experienced a measure of cognitive dissonance before him. And it is of course also possible (and likely!) that, even if no pressures to hold back were present, Shiller would disagree with me on several or even numerous points. It is a rare case in this world when two people agree on every point. Ask anyone who has ever been married for more than a week!
I credit Shiller for writing an amazing book and for producing the most important research ever published in this field. I would be horrified if any of my fellow humans ever came to the conclusion that I speak for him. I certainly do not. Nor does he speak for me, if you want to take it from the other direction. I am a guy who posts on the internet about his views on stock investing, views which are informed by a belief in the “revolutionary” (Shiller’s word) research produced by a Nobel-prize-winning economist in the year 1981, research which 100 percent discredits the Buy-and-Hold Model for understanding how stock investing works if it is indeed valid research (which I believe it to be), no more and no less.
We would all know more about what both Shiller and Bogle believe re all of these terribly important matters if as a society we came to the conclusion that we need to open every discussion board and blog to honest posting on safe withdrawal rates and scores of other important investment-related topics. We learn a little bit from this interview. But think how much more we would learn if we could ask Shiller to the next Bogleheads convention and put him on the hot seat for an hour (while anticipating putting Bogle on the hot seat in the following hour!) and if we did so in an environment in which it had become clear to every member of the community that we both permitted and encouraged hard-hitting questions on these matters because we understood as a people that it is by asking and obtaining clear answers to hard-hitting questions that we over time gain a better understanding of the realities. Shiller would both teach and learn in that environment, as would Bogle, as would I, as would you Goons, as would every single other community member who elected to participate in the powerfully enriching experience.
These are my sincere thoughts, Anonymous.
I naturally wish you the best of luck in all your future life endeavors.
Rob
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