I’ve posted Entry #505 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Great Intelligence Does Not Protect an Investor from Emotion Traps.
Juicy Excerpt: David dismissed the idea that we could ever again see a CAPE value that low. In fact, he views the idea that we will ever again see a CAPE value below 21 as at least somewhat outlandish. He said that he did not expect that I would see a CAPE value below 21 in the remaining years of my lifetime. I find that a shocking assessment. The median CAPE value is 16. That means that in half of the years for which we have records of stock prices the CAPE has been below 16. On what basis could someone conclude that we will never again go below 21?
So it is my emotion that has resulted in a $6 million portfolio and a paid for home. That emotion is called “contentment “. If I had less than $1 million, my emotion would be “panic”.
Emotion is a big part of it if you have money in stocks, Anonymous. If you have $6 million in stocks, then you have $3 million of real money that you can rely on to finance your retirement and $3 million of irrational exuberance that will be disappearing into the mist someday in the future.
You say that your emotion is contentment. It won’t be contentment when $3 million of the $6 million you were counting on disappears into thin air. You would be better off just treating that $3 million as irrational exuberance all along. What possible negative could there be to knowing the real, lasting numbers?
You say that your emotion would be panic if you only had $1 million. Well, if the $6 million is in stocks, you don’t have $1 million. Does that offer any comfort?
The benefit to research is that it teaches us things that we did not know before the research was done. Shiller helped us by publishing his Nobel-prize-winning research. Knowledge can never hurt you, it can only help.
If you don’t believe that Shiller’s research is legitimate, then don’t take it into consideration. That one is your call. But you cannot decide for others. It’s when you suppress discussions that others want to hear that you go to the wrong side of the felony line. That is ugly and stupid stuff. That’s the stuff that I oppose.
Anyway, emotion plays a big role in stock investing, if Shiller’s research is legitimate (I believe that it is). If you do not take emotion into account, you get all the numbers wrong. If emotion has an effect, smart investors need to take it into consideration.
My best wishes to you.
Rob
So all stocks, regardless of what those stocks are, you think is really double it’s value.
The market as a whole is today priced at two times its real value.
When the crash arrives, there will be some stocks that will go down by less than 50 percent and some that will go down by more than 50 percent. If you think that you have the ability to identify the ones that will do better, go for it. You can limit your losses that way. I personally have doubts as to whether most investors can pick stocks that effectively. Lots of Buy-and-Holders agree with me re that one. But you of course should do what you think is best for you.
Rob