Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Uh oh. Another article in which Robert Shiller says that Rob Bennett and his VII timing scheme are wrong.
https://www.fa-mag.com/news/was-the-stock-market-boom-predictable-44086.html?print
If investors would have follow Rob’s advice with VII, they would have missed on on the big market boom. Articles like this won’t look good in front of your jury.
I’m grateful for the link, Anonymous. It is of course always helpful to see what Shiller is saying re these matters. He’s obviously not saying anything even remotely close to what you are suggesting that he is saying.
Shiller is saying that the increase in stock prices from March 2009 was not caused by economic realities. The idea that stock price changes are caused by economic developments is the premise of the Buy-and-Hold Model. So he is here rejecting out of hand the entire Buy-and-Hold Model.
He is saying that predicting future prices is hard and I of course agree with that. Shiller has always said that and I have always said that.
I don’t see him saying in these words that knowing the extent of investor emotionalism that is present in today’s price does not permit one to gain a strong sense of where prices are likely to go over the long-term from that point forward. It was Shiller’s showing that that has been so for as long as the market has been in existence that caused him to be awarded a Nobel prize.
Shiller did not predict the price boom that we saw from 2009 forward and neither did I. That price boom was not entirely inconsistent with what we have seen over the history of the market but it was certainly very much an outlier result. He puts forward some explanations for that price boom that are EMOTIONAL rather than economic in nature. He is suggesting that, when the emotions shift, as they always do, prices will shift too.
That’s what makes high prices so scary. The long-term movement of the market is always in the direction of fair prices (it is the core job of all markets to get prices right). So, when prices are as insanely high as they are today, there is a much greater risk that they will be dropping hard in coming days than there would be if prices were at moderate or low levels. We cannot predict future prices precisely. But we can do a very good job of assessing risk. Risk is off the charts today. Given the increased risk in the market, investors who want to keep their risk profile constant over time need to lower their stock allocations from where they would want them to be if prices were moderate.
I don’t entirely agree with Shiller’s explanations of why prices might have gone so high. I don’t reject them out of hand. But I would put more emphasis on two factors: (1) efforts of the Federal Reserve to stabilize both the economy in general and the stock market in particular in the wake of the 2008 economic crisis and price crash; and (2) the enhanced feeling of security that investors felt when the huge price drop that we saw in late 2008 and early 2009 did not remain in place long. Shiller did refer to the second of those two factors. I think that was a big deal. It’s the stuff about Trump and Steve Jobs re which I am more skeptical. Shiller’s thought re those matters are speculative, in my assessment.
Say that the big factor is that investors felt reassured when the 2008 price drop did not remain in place for long. If that is the true reason for the price rise, we should all be scared re what may happen next. The higher confidence that investors feel today that high prices will remain in place can keep prices from falling for a time. But not forever. And, when they do fall, all of that excess confidence is likely to be shattered. So the price drop will likely be bigger than it would have been has we never experienced the excess confidence in the first place.
The difference between Buy-and-Hold and Valuation-Informed Indexing is that Buy-and-Hold says that price changes are rooted in economic developments while Valuation-Informed Indexing says that price changes are rooted in shifts in investor emotion. It is certainly true that shifts in investor emotion cannot be predicted precisely. So prices cannot be predicted precisely. But price changes do not follow a random-walk pattern if they are caused by shifts in investor emotion. Emotional highs bring on emotional lows. So the risk of big price drops is much higher when prices are high than it is when prices are low.
Shiller is saying here that today’s high prices are emotion-based, not reality-based or economics-based. That’s a very scary message for those who are going with high stock allocations today. An economics-based price would be one that you could count on. You cannot count on an emotions-based price. The same emotion that is causing investors to dramatically overstate stock prices today could cause them to dramatically understate stock prices next month or next year or two years from today. It’s not even just that we should expect stock prices to revert to fair-value levels. Irrational exuberance usually causes irrational depression. It is entirely possible that we will soon be seeing stock prices well BELOW fair-value levels. Yikes!
I am going to put this one on my list as fodder for a possible future column. Thanks again for bringing it to our attention.
And, yes, investors who followed my advice would have “missed out” on the big price boom from 2009 forward. Except, if Shiller is right in what he is saying, they would not have missed out on anything real. They would have missed out on a fleeting, emotional fantasy. If you want to have your retirement money tied up in a fleeting, emotional fantasy, I guess that’s your call. It’s not something that I want to do with my money and it’s not something that I feel even a tiny bit comfortable recommending for my friends. I say that investors should pull back from full participation in the stock market when it goes stark, raving bonkers, as Shiller is saying it did in the post-2009 period.
No, we cannot predict precisely when the return to rationality in prices will take place. But we can protect ourselves from experiencing its full negative effect on our financial future by pulling back a bit in response to the insane increase in stock market risk that applies when prices are where they are today.
Those are my sincere thoughts re this terribly important matter, in any event. I naturally wish you the best of luck in all your future life endeavors. my dear Goon friend.
Risk-Aware Rob
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