Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
There is no science or research involved. It is just your opinion on an article from 1981. Period.
Please mark me down as saying that Shiller’s Nobel-prize-winning research is science and that your death threats and acts of extortion are not.
And please feel free to spread the word all over the internet that that is indeed my take.
My best wishes to you.
Opinionated Rob
Anonymous says
Robert Shiller says Rob Bennett is still wrong.
https://www.ibtimes.com/what-do-prominent-economists-say-about-coronavirus-paul-krugman-robert-shiller-joseph-2943646
If Robert Shiller felt the market was overvalued, he wouldn’t tell people to stay in the market. Also notice how he blames the drop on Coronavirus and does not put any blame on buy and hold.
Rob says
Thanks for the link, Anonymous.
I certainly agree with Shiller when he says: “I would advise people not to take any extreme measures. Don’t think it’s the time to sell out completely, but also, don’t conclude it’s a big buying opportunity and push into leveraged positions in the market.”
He makes reference to the critical issue of investor emotion (irrational exuberance possibly being transformed into irrational depression) when he says: “I call this a co-epidemic: One is the coronavirus, and the other is like a narrative epidemic, about our confidence and outlook for the economy. That’s a new one, it’s happening fast, and it’s very contagious. Everyone’s talking about this.”
Shiller often used the term “narrative” when he is making reference to irrational exuberance. He is saying here exactly what I believe about this price crash. There is an economic side to it. And there is an investor emotion side to it. The part that I wish he would be more clear about is that the risk that we are going to take a huge hit on the investor emotion side of things is far, far greater when the CAPE value is 30 than it is when the CAPE value is 16. So as a society we should all be working at all times to keep the CAPE from rising much above 16.
The practical means for doing that is through market timing. There is no other way. The Buy-and-Holders preach price indifference. And that just doesn’t get the job done. Without the presence of market timing, prices always drift upward as a result of the Get Rich Quick urge that resides within all of us. Only a sound knowledge of the benefits of market timing can rein in the powerful Get Rich Quick urge that causes price crashes and economic crises.
Please mark me down as placing a good bit of the blame for this price crash on Buy-and-Hold. The Coronavirus was the precipitating event. But the size of any crash is largely determined by the CAPE value that applied when it begins. It is Buy-and-Hold that discourages market timing. The Buy-and-Holders took away the tool that we need to prevent this sort of things from happening.
Buy-and-Holders act like price crashes are acts of God, something that no one can do anything about. There’s a lot that we can do. If we educated investors re the benefits of market timing we would never see a devastating price crash. We would still see small ones. A Coronavirus-type event could show up when the CAPE was at 16. But the crash that would follow would not be nearly as devastating in those circumstances. The thing that has the potential to make this one so devastating is the huge amount of irrational exuberance that was present in the stock price before the Coronoavirus appeared on the scene.
That’s my sincere take re these terribly important matters, in any event.
My best and warmest wishes to you, dear Goon friend.
Shiller Follower Rob
Anonymous says
“ We would still see small ones. ”
Wrong. Take a look at what happened. Everything was being sold off for liquidity due to heavily leveraged markets. It had NOTHING to do with valuations.
Rob says
It appears to me that we disagree, Anonymous.
I naturally wish you the best of luck with all your future life endeavors, regardless of what investment strategies you elect to go with.
Valuations-Focused Rob
Anonymous says
It appears that you didn’t see that the Fed had to step in as a backstop to even money market funds.
Rob says
They’re trying to keep things from getting out of hand. That makes perfect sense. I applaud them for that.
The question is — Why did we as a nation set things up so that sooner or later we were going to need to take desperate steps to keep things from getting out of hand? Had we been permitting honest posting at every site on the internet all along, the CAPE could never have risen so high. Then you still have the problem of the economic effects of the Coronavirus. But you don’t have the problem of seeing trillions of dollars worth of irrational exuberance disappear into thin air at the same time. Buy-and-Hold takes any economic problem that we face as a nation and magnifies it.
And always at the worst possible time. To achieve what good purpose, you know? A temporary feeling that we all “outsmarted” the market by getting to enjoy the “benefits” of the pure Get Rich Quick approach for a few years? Huh? I’d rather have a stable economy. I’d rather be able to count on most of the money in my retirement plan remaining there for when I need it. I can live with a 6.5 percent real return each year. I don’t need the phony exaggerated returns that the widespread promotion of Buy-and-Hold brings us followed by the horrible economic destruction that always comes in its wake.
The same thing happened in 2008. Shiller predicted the 2008 economic crisis in his book, which was published in March 2000. How was he able to do that? He studied the historical return data. He saw what always happens in the years following a time when the Buy-and-Hold “strategy” becomes popular. Always widespread economic destruction. It’s a logical impossibility that it could ever end any other way.
Irrational exuberance doesn’t last. The market’s core function is to get prices right. That’s what markets do. So, let irrational exuberance go wild (It always does once a large number of investors come to believe that market timing is not always 100 percent required), and you are sooner or later going to see a wipe-out.
No one can say when. Short-term timing really doesn’t work, just as the Buy-and-Holders say. But discourage market timing in general and sooner or later you are going to see a wipe-out. It happens every time because it MUST happen every time. Once most investors refuse to engage in market timing, there is no other way for the market to get prices right, and that is the market’s core function.
Markets are information processing machines. Information comes in and causes ups. And then information comes in and causes downs. The market works things out. That’s what it DOES. That’s what a market IS — it’s an information processing machine. Fill people’s heads with the crazy idea that there might be some magical, mystical alternate universe where market timing is not 100 percent required and the means by which the information processing is achieved breaks down.
We have had mountains of information coming in over recent years telling investors that they need to lower their stock allocations. Have you seen many do it? Investors are afraid to lower their stock allocations. They understand that lowering your stock allocation because prices have risen too high constitutes market timing and they have heard the marketing slogan “timing never works” so many times that some part of their brains believes that there might be something to it. They are afraid to do the right thing, the sensible thing, the prudent thing, the research-based thing.
Buy-and-Hold started out telling people that they should root their investment strategies in the peer-reviewed research and it has evolved over the years into insisting that, no matter what they do, investors must never,never. never give the last 39 years of peer-reviewed research in this field the slightest consideration. I am the true Boglehead. I am the one who says that investors should do what Bogle said they should do in his early years — follow the peer-reviewed research. The Lindauerheads abandoned Bogle’s early teachings because to follow them would mean acknowledging that Bogle (and everyone else!) made a mistake back in the 1960s when they came to believe that Fama’s research showing that short-term timing never works can be interpreted as showing that no form of market timing is required. Huh?
The last 39 years of peer-reviewed research is information, Anonymous. Investors should be considering that information when they decide on their stock allocation. When discussion of 39 years of peer-reviewed research is banned at every site on the internet, the purpose of the market is defeated. The market cannot process information when it cannot even hear it The stock market as it exists today is not even a market in the true sense of the word, When the most important information is prohibited, the market cannot perform its very important job of processing all information available to it.
This is a repeat of what happened in 2008. There were genuine mortgage problems in 2008. Those problems set off the crash. But it was the insane CAPE values that applied that made the crash and the economic crisis that followed from it so devastating. The Fed stepped in and saved us from a Great Depression. That was a good thing. But you can’t just pump prices up to crazy levels and leave them there and expect that to work out in the long term. If you are going to pump prices up to stop a depression, you need to come back in a year or two and let prices drop back to reasonable levels. That’s where the Fed let us down. They let prices remain at crazy levels and thereby insured that we would sooner or later be facing the same sort of problem again. And here we are.
The only long-term solution is to open every discussion board and blog on the internet to honest posting re the last 39 years of peer-reviewed research in this field. I am 100 percent sure.
Fed Supporter (For the Things It Does Right) and Detractor (For the Things It Does Wrong) Rob