“If You Read the Newspaper Reports, They Will Say Something Like “Stock Prices Have Been Going Up Because Investors Are More Confident That the Economy Will Be Doing Well.” That’s a Rational Explanation of the Price Change. You Never Read That “Stock Prices Went Up Because Investors Are Concerned That They Have Not Saved Enough and Thus Do Not Have Enough to Retire On.” That’s Irrational Exuberance at Work.”

Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:

We have already looked at the numbers. It has been a disaster for you. Further, your retirement plan failed and you have admitted that you have to go back to work.

You’re not exactly an unbiased observer, Sammy.

I never retired in a complete sense. I saved enough money so that I would only need to earn a small amount doing work that was highly fulfilling and I would be fine. I have done that for 20 years now. The only part that didn’t work was that I was not able to earn money writing about the far-reaching implications of Shiller’s research findings. My work received a great reception from about 10 percent of the population. That’s been super. But there have been Buy-and-Holders like yourself who get so upset to see their strategy challenged that they become abusive and that has caused me to be banned at just about every investing site. So I have not been able to bring in an income. But that’s because of the emotional nature of the Buy-and-Hold strategy not because of any weaknesses in Shiller’s work. The problem is that Shiller’s work is so strong that it is perceived as a threat by many Buy-and-Holders.

You say that you have looked at the numbers. You have done so on numerous occasions. But every time you do it, you fail to account for valuations. Which is the entire point under discussion. If you account for valuations, you obviously come to very different conclusions. Stocks are currently priced at two times fair value. So, for the person who holds stocks today, you need to divide the number on their portfolio statement by two to know the true, lasting value of their holdings. You never do that. Buy-and-Holders don’t do that. Buy-and-Holders act as if the numbers on their portfolio statement were the word of God as to the value of their holdings. That’s the dispute. Is that number real or is it just the product of irrational exuberance?

Say that stock prices go up by 10 percent over the next three months. Would you count those gains as real? If you read the newspaper reports, they will say something like “stock prices have been going up because investors are more confident that the economy will be doing well.” That’s a rational explanation of the price change. You never read that “stock prices went up because investors are concerned that they have not saved enough and thus do not have enough to retire on.” That’s irrational exuberance at work. That’s what is really going on when prices are where they are today, according to Shiller’s research.

You say that the numbers don’t work for me because you calculate them according to the dictates of the Buy-and-Hold strategy, which has been discredited by the last 38 years of peer-reviewed research in this field. If you perform the calculations with an understanding that the numbers change when you account for the irrationality of many investor decisions, you obviously get different results.

This is what we need to be discussing at every investing site on the internet. If it is really true (I believe that it is) that every stock portfolio in the nation is worth only 50 percent of its stated value today, that’s a big deal. It’s a big deal for millions of investors and it’s a big deal for our entire economic system and for our entire political system. If trillions of dollars of spending power are going to disappear into thin air, that is going to put thousands of businesses into bankruptcy and millions of workers out of work. We need a national debate as to whether what Shiller said is right or not.

The only way to keep prices from getting out of hand is to explain to investors how they hurt themselves when they permit prices to get too high. And the only way to do that is to show them what the research says about what happens in time-periods following those in which we see high CAPE values. But that of course upsets Buy-and-Holders, who ASSUME that the numbers on their portfolio statement are real and that no adjustments for irrational exuberance are required.

You are criticizing me because I do not follow the Buy-and-Hold way of doing things. But of course the entire point that I am trying to bring to the table is that the Buy-and-Hold way of doing things is outdated. We now have a better way available to us. And I think that we all should be learning everything we can about it. I think that Buy-and-Hold is the past and that Valuation-Informed Indexing is the future.

Do you see why it makes it hard for us to have a productive conversation when you judge me by the dictates of an investment strategy that I do not believe in, that I believe has been discredited by 38 years of peer-reviewed research? Would you want to be judged by the dictates of some strategy that you do not follow, that you believe has been discredited by decades of peer-reviewed research?

Rob