“I See Market Timing As a Far Better Response to High Prices Than Price Crashes. We Can Achieve Gradual Corrections to Out-Of-Control Prices Through Market Timing. With Price Crashes, We See Huge Losses of Wealth Take Place Suddenly. Price Crashes Are a Shock to Our Economic System. It’s the Difference Between Adopting a More Balanced Diet When Your Doctor Warns You That You Are Overweight and Just Waiting for a Heart Attack to Arrive. A Price Crash Is the Economic Equivalent of a Heart Attack.”

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:

Shiller never said to use CAPE to time the market. To the opposite, he said not to use CAPE to time the market.

Shiller said (in 1996) that investors who failed to lower their stock allocations in response to the high CAPE value were going to live to regret it. He was encouraging people to use CAPE to time the market.

And good for him! Stock prices are self-regulating so long as investors practice market timing. Market timing (price discipline!) is magic. Stocks are today priced at two times their fair value. We obviously would all be better off if stocks were priced properly. How are we going to get prices down if we don’t engage in market timing? That is how it is done.

The alternative to market timing is just to wait for a price crash. Is that better? A price crash would mean that millions of people would suffer failed retirements. And trillions of dollars of spending power would disappear from the economy. That would push hundreds of thousands of businesses into bankruptcy and cause millions of workers to lose their jobs. Political frictions would increase, just as they did following the 2008 crash (many of the political frictions that we are seeing today got started with the 2008 crash, which was caused by the failure of many investors to practice market timing (price discipline) in response to the high CAPE values that applied in those days.

I see market timing as a far better response to high prices than price crashes. We can achieve gradual corrections to out-of-control prices through market timing. With price crashes, we see huge losses of wealth take place suddenly. Price crashes are a shock to our economic system. It’s the difference between adopting a more balanced diet when your doctor warns you that you are overweight and just waiting for a heart attack to arrive. A price crash is the economic equivalent of a heart attack. Not a good thing.

The reason why people who make a living selling stocks discourage market timing is that there is short-term money in it for them to persuade people that the thing they sell is always worth buying. For the investor and for the country as a whole, market timing is the far better approach to getting prices back to reasonable levels once we have all let our emotions get the better of us.

Are you able to suggest some means other than market timing or price crashes to get prices back to reasonable levels once too much irrational exuberance has put us in a dangerous place, Sammy?

Rob