“That’s the 2008 Economic Crisis. It Happened Because of Price Indifference. In All Other Markets, People Consider Price When Making a Purchase. If We All Did That When Buying Stocks, We Would Never See Another Out-of-Control Bull Market.”

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

Where did Shiller say that he could help everyone avoid an economic crash?

Here are some words from his book:

“If, over some interval in the first decade or so of the twenty-first Century, the U.S. stock market is going to follow an uneven course down, as well it might – back, let us say, to its levels in the mid-1990s or even lower – then individuals, foundations, college endowments and other beneficiaries of the market are going to find themselves poorer, in the aggregate by trillions of dollars. The real losses could be comparable to the total destruction of all the schools in the country, or all the farms in the country, or possibly even all the homes in the country.”

That’s the 2008 economic crisis.

It happened because of price indifference. In all other markets, people consider price when making a purchase. If we all did that when buying stocks, we would never see another out-of-control bull market. As prices rose, people would reduce their stock allocations. That would being prices back to reasonable levels. Stock prices are self-regulating in a world in which investors understand the long-term dangers of going with a pure Get Rich Quick/Buy-and-Hold strategy.

The only reason why Buy-and-Hold even exists is that there was once a time when academics believed that the stock market was “efficient” (that is, rationally priced). Shiller showed that that is not so. He showed that valuations affect long-term returns. If valuations affect long-term returns, then the market is not efficient and risk is not stable but variable. Investors seeking to keep their risk profile constant over time MUST practice price discipline. There is no other way to pull it off.

Buy-and-Hold was a mistake. It urges price indifference. Price indifference causes bull markets. And bull markets cause bear markets (because prices have to sooner or later return to fair-value levels for the market to continue to function). And bear markets cause economic crises (because the trillions of dollars of spending power lost cause people to spend less and cause the economy to contract). It would be better for every last one of us for us just to permit honest posting re the last 39 years of peer-reviewed research at every discussion board and blog on the internet. The only reason why we haven;t already done it is that it makes the experts in this field who have built careers around promoting Buy-and-Hold look really bad for people to learn about the 39-year cover-up, including all the criminal behavior that was employed to keep it going so long.

I believe that the next price crash will be the turning point. The human misery caused by price indifference will be too obvious to too many people at that time for the cover-up to continue. But I would think that, wouldn’t I? We are just going to have to wait to see how it all plays out to find out for sure.

My best and warmest wishes to you and yours.

Fan-of-Bringing-Economic-Crises-to-an-End Rob