Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
In this 1996 paper Shiller brazenly predicted a zero percent real total return over the ten year period starting in January 1996: http://www.econ.yale.edu//~shiller/data/peratio.html
Instead the results were 6.6% real per year. Now here’s where you blither about him being just a bit off, or just a bit early. You’ll spew some nonsense about how people who screw up like that don’t win Nobel Prizes. But the plain facts are that his ten year (“long term”) prediction was extremely clear, and it was spectacularly wrong.
And unlike you, Shiller learns from his mistakes. He will never make such a prediction again, no matter how much you want him grilled. You’re wasting your time waiting for Shiller to validate your folly. Ain’t gonna happen.
This post is gold in three respects, Anonymous.
One, I much appreciate the link to Shiller’s article from 1996. That’s the sort of thing that we all need to be talking about at every discussion board and blog on the internet. You are quite right in your suggestion that Shiller was at that time expressing himself in ways more akin to how I express myself. I obviously think that he was right on to do that. So I am glad to see confirmation of my impressions of what his research means in the link you present here.
Two, you were 100 percent right in your assessment of how I would react to the fact that Shiller was a little off in his comments. I acknowledge that he was off, there’s no dispute there. But I would say that he was 90 percent right and only 10 percent wrong (and that, unfortunately, that’s the best that any of us can do today, given the state of the world’s knowledge of how stock investing works in the real world). My assessment of Shiller’s “mistake” is precisely what you describe it to be.
Three, i think you are partially (but only partially) correct in your claim that Shiller “will never make such a prediction again.” I think you are right that it is his experience in not seeing these predictions come through that has made him reluctant to repeat them. I think that’s so of Bogle as well, if you want to know the full story. Bogle made a public comment about how future returns would be low because valuations were too high in the early 1990s and was proven as “wrong” re that one as Shiller was proven wrong re this one. And then Bogle himself engaged successfully in market timing in 2000, when he dramatically lowered his stock allocation because of the insanely high stock prices of that time. But this go-around he kept it to himself. He didn’t go sharing his opinions with others because he had had that earlier experience of looking foolish as the result of doing so. I get the sense that Shiller feels the same way. And so, yes, he is reluctant to offer predictions that are as clear and firm today.
But you say that he will “never” do this again. There I think you are wrong. I think that Shiller will return to making effective, research-based predictions in the wake of the next price crash, when the general public will be 10 times more receptive to his message than it is today. And Bogle will do the same. And everyone else in this field will do the same. That’s my sincere take.
The reality as demonstrated by every sliver of evidence available to us is that short-term timing never, ever, ever works and long-term timing always, always, always works and is always, always, always required for those who want to keep their risk profile roughly stable over time. For so long as prices remain insanely high, those who give public voice to these obvious truths are going to be met with a tsunami of hatred put forward by those desperately trying to retain confidence in the conventional wisdom of the pre-1981 time-period that it is not necessary to practice price discipline (long-term timing) to invest in stocks successfully for the long run.
I wish it wasn’t so. But it’s obviously so. I believe it will change with the next price crash. But we are all just going to have to wait a bit to find out for sure whether it does or not.
It is my strongly held view that Shiller was performing a huge public service by being so clear in the language that he used in the 1996 article. I wish he would speak the same way today. I understand why he is afraid to do so. I am entirely sympathetic to the situation he finds himself in. But I think we all need to hear the clear version of his message that he was happy to provide in the days before you Goons went completely off your rockers. But I think we will get the clear Shiller back again. It’s a question of us as a society sending the right signals. When we want clear Shiller, we will get clear Shiller. In the days following the next price crash, we will be sufficiently shaken up that we will all very much want clear Shiller.
I personally believe that even some of you Goons will be joining the party in those days, as amazing a “prediction” as that might appear to be to you. But we will see, you know?
My best wishes to you, old friend.
Clear-Shiller-Loving Rob
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