Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Robert Shiller says Rob Bennett is still wrong.
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.
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
feed twitter twitter facebook