“If Investors Were Rational, High Stock Prices Really Would Be a Good Thing. If Investors Were Rational, They Would Bid Stock Prices Up When the Economic Realities Improved. So Higher Stock Prices Would Signal Greater Wealth for All of Us. But, If Price Rises That Take the CAPE Value Above 16 Are Nothing More Than the Product of Irrational Exuberance, Those Price Rises Are a Very Bad Thing. They Make It Impossible for People to Know How Much Wealth They Possess, Which of Course Makes It Impossible for Them to Plan Effectively for Their Financial Futures.”

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

You have long held the position that we would some day see this huge market crash and that eventually buy and hold would be blamed and you would be rewarded for that. When challenged, you said to “wait and see how things turn out”. We are now in the era of Covid-19. If the market does well, the Fed will be credited for their support of the market. If we see a stock crash, Covid-19 will be blamed. Any small chance of your buy and hold crash scenario has now gone away. How else can their be any other outcome or conclusion? It’s over.

If we see a very damaging price crash over the course of the next year or two, it will be properly blamed on the coronavirus issue. But it will also be true that the relentless promotion of the Buy-and-Hold strategy will have caused the price crash to have been much worse than it would have been if we had all been taking price into consideration when buying stocks. If we did that, the CAPE would never have gone much above 16. Prices still would have fallen, perhaps to 12. That would be a price drop of 25 percent. But the way things are set up today, we may see a price drop of 75 percent (from a CAPE of 32 to a CAPE of 8). That’s a price drop of 75 percent. Buy-and-Hold/Get Rich Quick takes any economic problem and makes it much worse than what it would be if investors were able to learn what the last 39 years of peer-reviewed research teaches us about how stock investing works in the real world.

You say “if the market does well…” If Shiller is right (I obviously believe that he is), it is not possible for the market to do well. Stocks were priced at two times fair value when the coronavirus crisis hit. If prices drop to fair-value levels, that would be “doing well” in the sense that it would permit millions of people to better plan for their financial futures because they would know the true value of their portfolios. But people would be left knowing that their life savings is far less than they previously believed and they would cut back on spending, which would cause hundreds of thousands of businesses to go under and millions of workers to be thrown out of their jobs. If instead prices rose, that would be even worse. Then the inevitable future crash would be even more devastating because the loss of pretend wealth would be greater.

The creation of Pretend Wealth is never a good thing, Anonymous. It is impossible that it ever could be. You are a Buy-and-Holder. That is why you don’t worry about high stock prices. Buy-and-Hold is rooted in a belief in the Efficient Market Theory, which in turn is rooted in a belief in Rational Man Economics. If investors were rational, high stock prices really would be a good thing. If investors were rational, they would bid stock prices up when the economic realities improved. So higher stock prices would signal greater wealth for all of us, which of course would be a good thing. But if price rises that take the CAPE value above 16 are nothing more than the product of irrational exuberance, those price rises are a very bad thing. They make it impossible for people to know how much wealth they possess, which of course makes it impossible for them to plan effectively for their financial futures. Not good.

You say “it’s over.” I agree that it is over but not in the way that you mean. I say that it was over in 1981, when Shiller’s Nobel-prize-winning research was published in a peer-reviewed journal. Shiller’s research discredited the Efficient Market Theory. so we should have at that time buried Buy-and-Hold 30 feet in the ground, where it could do no further farm to humans and other living things. If Shiller’s Nobel-prize-winning research is legitimate research, Buy-and-Hold is the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind and there will obviously come a day when the destruction that it has caused will have grown so great that we will as a nation move on from it.

It’s been over intellectually for a long, long time. What has kept Buy-and-Hold alive for the past 39 years is an emotional urge, our Get Rich Quick urge. We all have a Get Rich Quick urge residing within us. We want to believe that we are richer than we are. Buy-and-Hold is popular because it flatters us, it tells is that the core reality of every other market that exists (that price discipline is absolutely essential for the smooth functioning of the market) doesn’t apply in the stock market. Shiller’s contribution was to show that the stock market works just like every other market that ever existed, that the “idea” that it is not necessary to take price into consideration when buying stocks is a dangerous fantasy.

We are there intellectually. We have been there for a long time. What we need to do today is to bring our emotions into tune with what the last 39 years of peer-reviewed research teaches us about how stock investing works in the real world. I believe that a huge price drop will cause a larger percentage of the population to become suspect of the pure Get Rich Quick approach and then the first true research-based approach (Valuation-Informed Indexing) will just grow and grow and grow. In the days following the next price crash, Buy-and-Hold will have lost the only edge that it continues to possess after the publication of Shiller’s Nobel-prize-winning research, the claim that it makes that gains that are the product of irrational exuberance are real and can be counted on to finance a retirement.

We’ll see, you know? If Shiller is wrong, then I am the biggest fool who ever walked Planet Earth. If Shiller is wrong, then I have wasted 18 years of my life. But, if Shiller is right, then Valuation-Informed Indexing is the future and Buy-and-Hold is the past. And I have spent the last 18 years of my life developing the model for understanding how stock investing works that will become dominant in coming days. That’s important work for which I can realistically expect to be well-compensated.

We’ll see.

My best wises to you and yours.

Future-Focused Rob