“The Most Important Research Was the 1981 Research. That’s What Changed the World. Buy-and-Hold Cannot Work If What Shiller Showed in 1981 Is Real.”

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 81 paper did not address using PE10 to predict future stock returns. That was the 88 Shiller Campbell paper.

The 81 Shiller just addressed stock price volatility. “Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends”.

Sean:

You are making a helpful point. I am grateful.

I think it is important to understand, though, that it was the 1981 research that was “revolutionary” (Shiller’s word) in its implications. The Wikipedia article notes that it was the 1981 article that challenged the Efficient Market Hypothesis. That’s what changed the world. It is universally accepted that price discipline is needed in every market other than the stock market. The thing that threw everybody off re stocks was the Efficient Market Hypothesis. If the market truly were efficient, Buy-and-Hold would be the ideal strategy. But Shiller showed in 1981 that that is not so. He removed the foundation stone of the Buy-and-Hold concept.

Once you know that Buy-and-Hold does not work, the next step in the logic chain is to determine what DOES work. That’s where using P/E10 to predict future stock returns comes in. The 1988 research builds upon the 1981 research. Shiller would not have even thought to look at that question had he not first discredited the Efficient Market Hypothesis/Buy-and-Hold. Wade Pfau and I went another step down the logic chain when we showed with our research that a 30 percent/60 percent/90 percent Valuation-Informed Indexing strategy has performed better than Buy-and-Hold on a risk-adjusted basis for all 30-year time-periods in the historical record (there were a small number of 30-year time-periods in which Buy-and-Hold did better on a nominal basis). And other researchers will of course explore other aspects of the question in days to come and we will all live better lives from that point forward as a result.

The most important research was the 1981 research. That’s what changed the world. Buy-and-Hold cannot work if what Shiller showed in 1981 is real. If the market is not efficient, common sense tells you that you need to exercise price discipline when buying stocks. Why wouldn’t you? The only reason anyone ever gave not to do so was the Efficient Market Hypothesis, which was just a mistake.

The bottom line on all this is that we all need to be talking about this stuff at every discussion board and blog on the internet. We made a great leap forward intellectually in 1981 and we made additional big leaps forward in 1988 and in 2011, when Wade and I published our paper. We all should be doing everything in our power to keep the ball rolling. We all should want to see as much research on these questions as possible and we all should want to see as much discussion of the implications of the research published as possible. Learning experiences are the one true free lunch in this world.

Do you agree?

Does it concern you that Shiller challenged/discredited the Efficient Market Hypothesis in 1981 and yet there are still people promoting the investment strategy that follows from that hypothesis today, in the year 2018? It scares the beejeebers out of me. If the market is efficient, the safe withdrawal rate is always 4 percent. If valuations affect long-term returns, as Shiller’s work (BOTH the 1981 and 1988 papers) showed, the safe withdrawal rate for those who retired in January 2000 was only 1.6 percent and those who retired at that time and were persuaded by the Buy-and-Holders to take a 4 percent withdrawal have only a 30 percent chance of seeing their retirements survive 30 years. That scares me to death. That means that we will likely be seeing millions of failed retirements in days to come. This will be one of the greatest public policy crises in the history of our nation. How do you think people are going to feel when they learn that those millions of failed retirements could have been avoided just by us electing as a nation of people to open every discussion board and blog on the internet to honest posting re the last 37 years of peer-reviewed research in this field?

I can use all the help that I can get. If you are prepared to sign up for The Cause, we have plenty of room for you, my new friend!

Recruiter Rob