Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
“The reason why I changed the date is that we do not know the date.”
So you finally admit that you can’t time the market. Can you change the subject now?
I write this already knowing your mealy-mouthed response. You can’t time it SHORT TERM. Short term meaning within any time frame at all. Or in Shiller’s case, a whole decade. I would be simply thrilled if you would come back with something you haven’t written a hundred times before.
I cannot come back with anything different because the same story still applies, Anonymous. Short-term timing never works. That’s been true for 150 years of stock market history. Long-term timing always works. That’s also been true for 150 years of stock market history. That’s just the way it is. I didn’t create the stock market, you know. It’s not my doing that it is the way it is. I just report on what the peer-reviewed research says and the peer-reviewed research just reveals the realities.
Say that you were trying to figure out how many cans of beer a person can drink before he caused a car accident. And you accumulated data showing that drinking one can of beer has virtually no correlation with car accidents. Two cans has a slightly higher correlation but the odds are still strong that a person drinking two cans of beer is not going to get into an accident. And a person drinking ten cans of beer gets in an accident in the vast majority of cases. What conclusions would you draw from this data?
The way that the Buy-and-Holders analyze things, they would conclude: “You cannot tell whether a person is going to get in an accident by looking at whether he has consumed beer or not — there are many cases in which people consume beer and don’t get in accidents.” Is that true?
It’s true in some hyper-technical sense. There is no number of cans of beer that you can identify as the number that certainly causes an accident. You might look at someone who has drunk six cans of beer and say: “This guy is going to get in an accident for sure! He can barely stand up!” Still, there are cases in which someone drinks six cans of beer and does not get in an accident. So those who follow the Buy-and-Hold approach to data analysis say: “You cannot look at the number of cans of beer consumed to know if there is going to be an accident or not! The data doesn’t tell you the precise number of cans of beer it takes to cause an accident in each and every case! So we cannot draw any conclusions from this data!”
I just don’t buy it, Anonymous. You CAN draw conclusions. Drinking beer increases the risk of car accidents. The more cans you drink, the more risk there is. It’s the same with stock investing. Overvaluation causes price crashes. The higher the P/E10 level, the greater the risk.
Shiller looked at where things stood in 1996 and saw that we were in a situation where investors had drank six cans of beer. He concluded from the data that we would see a crash because the odds were strongly in favor of one. We didn’t have one within the time-frame of his prediction. The six-beer car driver got lucky. The Buy-and-Holders concluded: “Hey! We never need to worry about drinking beer again! Six cans won’t cause a crash! Neither will twelve cans! Neither will fifty cans! Beer-drinking doesn’t cause car crashes ! Shiller’s failed prediction proves it!”
It doesn’t. Shiller’s failed prediction shows that it is very hard to make precise predictions of WHEN overvaluation is going to cause a price crash. But it always does. There has never been one exception in the historical record. Overvaluation increases the risk of a price crash in each and every case. In some cases, the bad outcome pops up relatively quickly and in other cases it take more time than you would expect for the bad outcome to pop up. But it is not as if it makes much difference. The bad outcome still wipes you out. You still would be better off not drinking so much beer before driving. You still would be better off permitting investors to have access to the information they need to have access to to avoid letting valuations get so out of hand.
Stocks are risky for one reason. Buy-and-Hold strategies become popular from time to time and then valuations inevitably get out of hand. It’s not like there’s nothing we can do about it. We today have 37 years of peer-reviewed research showing us the dangers of Buy-and-Hold/Get Rich Quick. Why not tell people about it? Why not permit honest and accurate reports on safe withdrawal rates and lots of other critically important investment-related topics? Permit honest posting on the peer-reviewed research and stock prices become self-regulating. It seems to me that we will all live in a better world when stock prices will never again be able to go to these extreme highs or these extreme lows.
You absolutely can time the market. Not with precision. Buy you can time it. That’s been true for the entire history of the market. Just as it has been true that drinking beer has been causing accidents since the beginning of car-driving even though we cannot say with precision how many beers will cause an accident in a particular case. Overvaluation is risky. So we should all avoid it. And we should do everything we can to help others avoid it. Just because we cannot say with precision what day a crash will come in a particular case is not reason not to warn people on a daily basis of the dangers of buying overvalued stocks. The crashes caused by overvaluation hurt all of us in very, very, very serious ways. Those of us who love stocks as an asset class want to see Buy-and-Hold buried 30 feet in the ground where it can do no further harm to humans and other living things.
My sincere take.
Sober Driving Rob
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