Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
“That keeps the irrational exuberance down and permits us all to obtain higher returns while taking on dramatically less risk. ”
No it doesn’t and it can’t.
Imagine your unrealistic scenario happened, the price of stocks fell to CAPE 16 and volatility was greatly reduced. At that point Rob Bennett would buy stock (if what he has been saying for the last 18 years is true).
From who?
What sort of idiot would sell low volatility/high return stocks to you. I certainly wouldn’t. You say that there is always someone willing to sell and that is true. Your problem is people like me and others who aren’t idiots.
If stocks did sell at CAPE 16 promising low risk 6.5% real returns then the flood of people wanting to but such a unicorn investment would drive the price up. You need low risk 6.5% real before you will invest in stocks, well what about people who will accept 6.4% real, or 6.3% real. They will outbid you and get the stocks instead of you.
What am I supposed to do stick my money under my bed or invest in super low return bonds. No, if low risk/high return assets are available I will invest in them, as will millions of others and they will outbid you driving prices up. (And by the way if you say that lenders will need to offer higher interest rates that will simply demonstrate that you don’t know how the bond market works. The yield of bonds is driven by how much people are willing to pay for them, not the coupon rate)
In other words the magical low risk/high reward future you imagine would only work if no one knew about it.
We completely disagree, Evidence.
There is nothing unicorn about the idea of stocks being a low-risk asset class. Stocks are not TODAY thought of as a low-risk asset class only because prior to 1981 we did not know what made stocks risky (the idea that market timing is not required). Now we know. So now we can all enjoy low-risk stocks if we care to. It is up to us.
There are lots of things that we enjoy in our daily lives that in the days before the progress that was achieved that brought them into existence could have been described as unicorns. Penicillin was once a unicorn. Air travel was once a unicorn. The Beatles were once a unicorn. Laptop computers were once a unicorn. Cell phones were once a unicorn. Women working in jobs outside of the secretarial and nursing realms was once a unicorn. Black people feeling free to vote was once a unicorn. And on and on. Every great advance was once a unicorn. That’s why we call great advances ADVANCES. They bring something new and wonderful into the world.
Shiller’s Nobel-prize-winning research is a great advance. A unicorn, to use your terminology. There was a time when it didn’t exist. Now it does. Shiller brought something new and wonderful into all of our lives. Good for him, you know? I am fine with that.
Would stocks be more appealing in a world in which honest posting re the last 39 years of peer-reviewed research was permitted at every discussion board and blog on the internet? Obviously. That’s what we all should want. That’s a plus. The entire reason why we encourage people to do research into how stock investing works is so that we can make stock investing more appealing. I hardly see how the fact that Shiller succeeded in the task is a reason to ban discussion of his research. I mean, come on.
You are saying that, if we permit honest posting, stocks will come to be so appealing that people will buy them like crazy and the price will get too high. I don’t think so. If the price gets too high, the research will tell people that the long-term value proposition is no longer there and people will sell and the price will come down. Stock prices are self-regulating in a world in which honest posting is permitted. We simply do not need to worry about the problem that you are pointing to. The market will take care of it. That’s what markets do. The market today cannot function because we are not permitting honest posting. But, if we permit honest posting, we free the market to do what markets do, which is to get the price right. So it will all work out.
I believe that there is one aspect of your suggestion that is probably correct. The returns on low-risk asset classes have been set artificially low because of the ban on honest posting. When people come to believe that
there is no price at which stocks are not worth buying (which is a crazy belief but one that many people hold in the Buy-and-Hold Era), they invest in low-risk asset classes only as a sort of stabilizing factor in their portfolios, not for the return that they offer. In a world in which stocks are a low-risk asset class too, people will naturally compare the returns on stocks and the investment classes that are today thought of as low-risk asset classes and decide between the two on the basis of return. Stocks would beat those asset classes today by a country mile. So, yes, it is fair to say that the market is going to need to make adjustments when the internet is opened to honest posting re the last 39 years of peer-reviewed research.
The obvious adjustment would be for the returns on the low-risk asset classes to increase. Stocks will be very appealing when the risk is low and the return is 6.5 percent low. But there will still be some volatility in stock prices. My guess is that the CAPE might vary from 12 to 20 in a world where honest posting was permitted. So people would still want to own TIPS and IBonds and CDs so long as the returns on those asset classes were increased enough to bring them closer to the return offered on stocks. So perhaps the return on safe asset classes would increase to 3 percent real or 4 percent real.
Would that be so terrible a thing? I think it would be a wonderful thing. I don’t personally see any downside. If that’s what the market says the return should be on low-risk asset classes, then let it happen. I see no reason to artificially hold those returns down by prohibiting honest posting re the last 39 years of peer-reviewed research.
The 6.5 percent real return that I have said will apply for stocks is not something that I made up. That is the average, long-term return. It’s an historical fact. All that I am saying is that we should let people know when the likely 10-year return is something different. When the likely 10-year return is 15 percent real, as it was in 1981, we should tell people that. And, when the likely 10-year return is a negative 1 percent real, as it was in 2000, we should tell people that. For the market to function properly, investors need to be informed as to the return that they are likely to obtain on their stock investment. So we should all get about the business of informing them. We all will live better lives when we permit the market to function smoothly and effectively.
My sincere take.
Unicorn Chasing Rob
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