“There Are Lots of Good and Smart People Employed in Some Way in Careers That Relate to Stock Investing. Most of Them Feel Threatened by the Huge Intellectual Advances Achieved by Shiller. They Are Going to Have to Go Back and Tell Their Clients That They Didn’t Always Know Everything There Is to Know About How Stock Investing Works.”

Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

“This is what has happened in cases in which the market is either overpriced or underpriced.”

What about the bond market? Can your crystal ball determine times when it’s over or underpriced too, based on its version of the P/E 10 (interest rates)?

Treasury Inflation-Protected Securities (TIPS) are government bonds. They are insured by the government, so they are are close to a risk-free asset class as you are ever going to see. TIPS were offering a return of 4 percent real at the top of the bubble. You could obtain that return for any time-period you wanted. They were available for short terms. And they were available for terms of up to 30 years. I had not at the time studied this stuff in anything close to the depth at which I have studied it today. But I could tell at the time that TIPS at 4 percent real was an amazing deal, a once-in-a-lifetime value proposition.

We should all be wondering why that deal was so amazing. I mentioned that that deal was available at the top of the stock bubble. The government wanted to sell the bonds and people just did not want to buy them. I am sure that the people who set the return would have preferred to have set a lower return. To offer 4 percent real on a no-risk asset class just makes no sense. I think that they determined that they couldn’t sell them if they offered only a sensible return. TIPS were at the time competing with stocks. And the return on stocks from 1996 through 1999 was 126 percent. So it was hard to persuade most people to buy anything other than stocks. There were some people who were willing to switch when you offered this crazy return, 4 percent real on a risk-free asset class. So that’s where the TIPS return ended up.

Shiller is not really an investment adviser. That is how he is perceived because his most important work relates to stock investing. But Shiller is really an economist. For many years before Shiller came along, economists have had a mistaken understanding as to how lots of economic transactions work. They have something called the “Rational Man” theory, which dates back to Adam Smith. They examine all sorts of issues by assuming that people are engaged in the rational pursuit of their own interests. This is not entirely correct. People are of course capable of rational action. So it is TO SOME EXTENT true. But people are also emotional creatures. So there are many circumstances in which people FAIL to pursue their self-interest when engaging in economic transactions.

Most advertising appeals to the emotions because that is what works; only a small percentage of advertising describes the specifications of goods and services, which is what it all would do if people were 100 percent rational. Shiller belongs to a school of economics (Behavioral Economics) which breaks with the conventional school going back to Adam Smith and which studies how people act IRRATIONALLY when engaging in economic transactions. There are no crystal balls in use in the investigations pursued by economists in this school. They are scientists. They are scientists who discovered that earlier scientists made a mistake and they are trying to correct that mistake and thereby help us all to live better lives.

The idea that the stock market is efficient/rational is a MISTAKE. The shifting psychological moods of investors are a reality that anyone trying to understand how stock investing works needs to come to terms with. Shiller’s work helps us to understand properly how the world around us works. It is SCIENCE, not crystal-ball gazing. If investor psychology affects results, you need to be willing to take investor psychology into consideration to know what you are talking about.

There is so much money tied up in the stock market that coming to terms with what the last 37 years of peer-reviewed research teaches us about how stock investing works is going to enhance our understanding of just about everything around us. Shiller’s research is “revolutionary” (his word). Shiller merited his Nobel prize. Shiller changed EVERYTHING. This is the primary reason why it has taken so long for his work to have the practical effect that it will ultimately have. Shiller’s research is in the process of bringing on a paradigm change.

There are lots of good and smart people employed in some way in careers that relate to stock investing. Most of them feel threatened by the huge intellectual advances achieved by Shiller. They are going to have to go back and tell their clients that they didn’t always know everything there is to know about how stock investing works and that is going to cause their clients to experience some doubt as to whether they are truly “experts.” They are going to have to do revisions to books and articles that they have published. They are going to have to reeducate themselves. Things that they learned in school many years ago and that they thought were eternal truths have been put into question by Shiller.

This is all good. This is all wonderful. We all benefit when our understanding of the world around us becomes stronger and clearer and fuller and more accurate. Shiller’s breakthrough research is in an ultimate sense a 100 percent positive thing. But it doesn’t seem positive on first impression to people who have spent years or decades building careers rooted in a very different understanding of how stock investing works. So there has been a lot of resistance to Shiller’s ideas.

The primary form of resistance has been to patronizingly ignore the implications of Shiller’s work. What most people in this field do is to say that Shiller is great (it’s hard to argue otherwise when he has been awarded a Nobel prize for his work) and then to return to offering the same investment advice that was being offered before Shiller came along. I became controversial on the internet because I refused to go along with that program. As you Goons like to put it, I “misbehaved.” I said: “The safe withdrawal rate cannot possibly be the same number at all times if Shiller is right that valuations affect long-term returns and I refuse to tell my friends planning retirements that that is the case.” I had to be banned because, if one person spoke openly about the many far-reaching implications of Shiller’s work, the Buy-and-Hold gig was up. And there are hundreds of thousands of careers and reputations tied to the survival of the Buy-and-Hold project.

I didn’t do what I did to hurt anyone or to upset anyone. I came over time to become friends with my fellow community members and so I felt that I owed it to them to post honestly re the numbers that they were using to plan their retirements. From my perspective on the morning of May 13, 2002, this was simple stuff. I obviously did not realize what an enormous hornet’s nest I had wandered into. Now I know.

On the one hand, I have learned that lots of people do not want to see knowledge advance in this area. On the other, I have learned that lots of people DO want to see knowledge advance. That includes lots of our Buy-and-Hold friends. Bogle has on occasion put forward words indicating that he would like to see knowledge advance in this field. If Bogle has some feelings of that nature, everyone in the field has some feelings of that nature.

The trouble, of course, is that Shiller did not publish the amazing research last week or last month or last year. He published it 37 years ago. So those trying to make a transition from Buy-and-Hold to Valuation-Informed Indexing need to explain not only why they once held a mistaken idea of how stock investing works but also why it took them 37 years to acknowledge the mistake once it was revealed by the peer-reviewed research.

That’s a tough one. It’s an unfortunate reality. Still, the bottom line remains that the good that follows from an embrace of the Shiller revolution is 50 times more good than the bad that comes from the difficulty of making the transition from one way of thinking about how economic transactions are conducted to a new and better informed view. We are going to make this change and so the best thing is just to get about the business of working together to help it take place. That’s my sincere take, in any event.

Shiller changed everything, Anonymous. I have written several columns pointing out how he changed politics. There are hundreds of internet sites that every day explore pro-Trump vs. anti-Trump developments in the political world. If Shiller is right, the biggest risk to the Trump presidency is high stock valuations which may cause a price crash and then an economic recession in the next year or two or three. How often have you seen one of these political sites discuss P/E10? I have never seen a discussion of P/E10 in the political context outside of my own writings. It amazes me that this is so. But it is so.

Shiller changed everything. He started a revolution. Either economic transactions are conducted by rational actors or economic transactions are conducted by HUMANS who are indeed partly rational but who are also partly emotional. If we change economics to take into consideration the emotional side of all economic transactions, we come to understand just about everything that goes on in the world around us better than we understood it before Behavioral Finance became a thing. I support the Behavioral Finance school of Economics. I believe that humans are capable of rationality but also often engage in emotional behavior. So I naturally believe that the Buy-and-Hold investing strategy — which is rooted in a belief that investors are collectively 100 percent rational in all of their investment choices at all times — is on the way out and that Valuation-Informed Indexing is the future (I of course also believe that the Buy-and-Holders were responsible for scores and scores of powerful insights for which we all should be grateful and which we should incorporate into the new model to make it the best and most accurate model that it can be).

Shiller changed everything. So, yes, he changed our understanding of bonds too. We should be engaging in explorations of how he changed our understanding of bonds at every investing discussion board and blog on the internet. But of course to do that we would need to open every investing discussion board and blog on the internet to honest posting re the last 37 years of peer-reviewed research in this field. Which of course is the thing that I have been arguing for going back to the morning of May 13, 2002, and which has caused you Goons to assert that I am guilty of “misbehavior.”

The world changed in 1981. In a very, very, very good way. It is now 2018. It is time for us all to start tapping into the benefits that were opened to us by the publication of Shiller’s magical research efforts of the past four decades.

That’s my sincere take re these terribly important matters, my dear Goon friend. I naturally wish you all the best that this life has to offer a person, in any event.

Crystal-Ball-Viewing Rob