“More People Are Affected By the Stock Market Today Than Has Ever Been the Case Before. So Bubbles Have the Potential to Cause More Harm Than They Have Ever Caused Before. I Think We Need to Advance in This Area If Our Capitalist Economy Is to Survive.”

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 predicted the 2008 economic crisis in a book published in March 2000, Anonymous. Had the ideas in the book been widely promoted, we could have avoided that economic crisis. Shiller’s work shows that stock prices are self-regulating so long as investors have access to good information and are encouraged to act in their self-interest. We all would have been better off had we avoided the economic crisis.”

There have been bubbles in the price of assets throughout recorded history and there will continue to be bubbles because humans are emotional.

Any investing plan that relies on human emotion going away and bubbles ending is doomed to failure.

There was a time when lots of people would have said: “There has been slavery in the United States since its founding and there will continue to be slavery because humans are racist.”

There was a time when lots of people would have said: “There will never be cancer warnings on packages of cigarettes because the tobacco companies don’t want them and they have a powerful lobby.”

There was a time when lots of people would have said: “People will always need to compose papers and articles and memos on typewriters because nothing will ever come along to replace them.”

Things change, Evidence. Sometimes they change for the better. In fact, I think a good argument can be made that it is the reality that things change for the better that underlies that amazing 6.5 percent real return that applies in the stock market. To get that return, we need to see economic growth. To see economic growth, there has to be change for the better.

So I don’t agree that there will always be bubbles. At least not to the extent that they have always existed before. I agree that humans will always be emotional and that it is human emotion that produces bubbles. So I agree that there will always be a RISK of bubbles. But I think it is possible that humans can advance in their knowledge of what they need to do to diminish the bubble problem.

I think things can move forward. My personal belief is that things MUST move forward. More people are affected by the stock market today than has ever been the case before. So bubbles have the potential to cause more harm than they have ever caused before. I think we need to advance in this area if our capitalist economy is to survive. I very much want it to survive. And I very much believe that it can survive given how much more we know today about how to prevent bubbles than we ever knew before.

Shiller was awarded a Nobel prize for his amazing work. That’s a big deal. When a society awards someone a Nobel prize, it is making a statement re the importance of that person’s work. As a society we have made a statement that we value Shiller’s work greatly (I acknowledge that we have made some contrary statements at the same time). I think that we are in the process of making some amazing steps forward.

At any rate, Valuation-Informed Indexing does not rely on human emotion going away and bubbles ending. It tells investors how to act to preserve their own retirement hopes in the event that we continue to see bubbles. Valuation-Informed Indexers are under no illusions that human emotions will ever go away. We believe that the worst excesses of human emotion as it is applied to the stock investing project can be reined in and that it would be a good thing if the worst excesses indeed were reined in.

I am optimistic re the future.

And in fairness I think I should say that it was the Buy-and-Holders who laid the groundwork for a lot of the advances that we are in the process of achieving.

My sincere take.

Rob