Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Can you introduce me to this VII investor that has been following VII since 1870? I would like to meet him and ask him a few questions.
This is why I have been calling for the launching of a national debate re these matters. That national debate will be our opportunity as a people to ask ourselves some profound questions about our behavior as investors going back to the time when the first stock market opened for business.
There is only one difference between Buy-and-Hold and Valuation-Informed Indexing. Buy-and-Hold is rooted in a belief that investment choices are rational. If the decisions we make about stock investing are rational, it follows that the market price does a good job of reflecting the true value of our stock holdings. Buy-and-Hold makes intuitive sense. OF COURSE investors are rational when deciding what to do with their retirement money. Their financial futures are at stake. Why would they not make rational choices?
Valuation-Informed Indexing is rooted in a very different premise, one that most people find highly counter-intuitive. Shiller’s wife has a degree in psychology. She got him interested in doing the “revolutionary” (his word) research that he did by talking to him about the many ways that research in the psychology field shows that humans are generally NOT entirely rational creatures. We certainly engage in large amounts of rational behavior. We are the rational animal. But the full reality is that we are also the rationalIZING animal. We lie to ourselves. All the time. Our brains are capable of discerning truth. But when our brains tell us something to which we have a strong emotional repulsion, we turn off our brains and go with what we want to believe over what the evidence shows to be the reality.
There are many alcoholics who are highly functioning people. They hold good jobs. They make lots of money. They help people. They are respected in their communities. All the while, they are engaging in behavior that threatens to destroy their family and their reputation and their health. What happens if a friend tries to tell an alcoholic that he has a problem that he needs to address? The alcoholic gets angry and insists that he can quit drinking any time he pleases. He has no problem. He will give up the friend if it comes to that. He will not give up the drink that is in the process of destroying him. Rational? Not even a tiny bit. But the alcoholic is not dumb. He develops in his mind a logical case for why he has the drinking under control that is strong enough for him to persuade himself that it is so. He is not entirely persuaded. If he were, he wouldn’t get angry when the subject came up. He is sufficiently persuaded to be able to go on drinking, which is his deep emotional desire.
That’s the story, Anonymous. We invest irrationally. We delude ourselves. We are all in on it. The investment advisers are in on it. The academic researchers are in on it. The bloggers are in on it. The book authors are in on it. To get to a CAPE value of 30, we pretty much all need to be in on it. If we permitted the Buy-and-Hold dogmas to be challenged in public places, the illusion would shatter and we would gain the ability to invest more effectively. That sounds like a good thing just as it sounds like it would be a good thing for the alcoholic to stop drinking. But the idea of not drinking is hated by the alcoholic and so he uses all his energies to develop ever more complicated rationalizations for why his drinking behavior is just fine. And the idea of acknowledging that our stock portfolios are worth only one-half of what we have fooled ourselves into believing they are worth is hated by the Buy-and-Hold investor with a burning, undying hate. He will stop the discussion of the 38 years of peer-reviewed research showing us that this is so if it is the last thing he does.
Shiller is trying to help us. He is trying to take us to a new place, a better place, a place where we can earn higher returns while taking on less risk. But, to get there, we need to work up the courage to acknowledge that we did not always know everything that there is to know about stock investing, that it was still possible in 1980 that we could achieve huge advances if we continued to perform research and to give those who came up with revolutionary research findings a fair hearing.
You say that you want to ask questions of the investor who has been around since 1870. The question that you should be asking is: “Why have you f’d up so terribly so many times? U.S. stocks provide a long-term average return of 6.5 percent real. How could anyone ever come up with a strategy that would cause that investment class to be less than a stellar choice? But look at what the price indifference that is at the core of the Buy-and-Hold project has done to us over and over again over the years. A Great Depression when the CAPE value hit 33? Huh? What the f? Stagflation when the CAPE value hit 25? Huh? What the f? A Great Recession that caused millions to lose their jobs and that has brought on a good bit of political unrest in recent years when the CAPE value hit 44? Huh? What the f?
The question that I would ask the 1870-2019 investor is: Why do you keep doing this to yourself? Why not just practice price discipline when buying stocks as you do when you buy sweaters and bananas and automobiles? Wouldn’t that make more sense?
Valuation-Informed Indexing makes all the sense in the world. The trouble is that it makes as much sense as telling an alcoholic to join a 12-step program. It could solve a huge problem. But it would solve the problem by causing humans to give up a cherished illusion and the emotional humans love their illusions so much that they will fight very, very, very hard to hold on to them.
Shiller is trying to help us. The peer-reviewed research in this field is trying to help us. The thousands of our fellow community members who have expressed a desire that honest posting be permitted at every discussion board and blog on the internet are trying to help us. Will we let them? That’s the question that we most need to be asking the 1870-2019 investor, who is us.
I think that we are going to permit ourselves to advance to a far superior approach to investing, the first true research-based strategy. I wish that we were not doomed and determined by our emotional nature to hurt ourselves so seriously before getting to the point where we work up the courage needed to take the leap. But that’s the reality of the day. We want to move forward. If we didn’t want to move forward, we would not have awarded Shiller a Nobel prize for his work. But we very, very, very much want to keep drinking too. We want to believe that the numbers on our portfolio statements are rooted in economic realities and that we can count on those fictional amounts to finance our retirements. We are for the time stuck standing at the threshold of something amazing and afraid to take the step forward that we need to take to live better lives from that time forward.
I wish us luck!
Rob
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