“The One Thing That Matters Is the Extent of the Emotional Content Present in Stock Prices Because That Tells Us the Extent to Which We Are Kidding Ourselves.”

Set forth below is the text of an e-mail that I sent on December 10, 2018, to James Peltz, a reporter for the Los Angeles Times who wrote an article titled The Stock Market’s Severe Drop: Normal Pullback or an Ominous Sign?:

James:

My name is Rob Bennett. I read your article “The Stock Market’s Severe Drop: Normal Pullback or an Ominous Sign?” This is of course a question that many investors are pondering today. I ask that you consider — to what extent is our collective answer to that question determined by our core belief as to whether stock prices are determined by economic developments (as the Buy-and-Holders believe) or by investor emotion (as Nobel-prize-winning economist Robert Shiller argues in his book “Irrational Exuberance”)? 90 percent of today’s investors are Buy-and-Holders. So they tell themselves that we are working through a rational process. But, if Shiller is right, all of the arguments that we come up with for why what the market does makes sense are rationalizations. The one thing that matters is the extent of the emotional content present in stock prices because that tells us the extent to which we are kidding ourselves. Today’s P/E10 level tells us that the influence of investor emotion in stock prices is very high today indeed.

I explore this aspect of the question in a good bit of detail in the attached article. In the event that it pulls you in, I would love to hear any reactions.

I wish you the best of luck in all your future life endeavors.

Rob