Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Why haven’t things worked out the way you said they would? Why didn’t we see the big crash?
This is a big question. If Shiller’s Nobel-prize-winning research is legitimate research (I believe that it is), then this is a question that we should be examining at every investing site on the internet on a daily basis. If Shiller is right, then when stocks are priced as they are today, half of our portfolio value has no economic substance to it and is comprised of nothing more than irrational exuberance. The question of when prices will return to reasonable levels is huge. Knowing that tells us when hundreds of thousands of businesses will fail and when millions of retirements will fail and when we will see a spike in political frictions and on and on. So we all need to come to a better understanding of why the crash has been delayed (this is the longest time-period in U.S. history in which prices have remained at super high levels).
The key to understanding this is to avoid falling into the trap of seeking economic explanations of what has happened. That’s pre-Shiller thinking. What Shiller showed is that much of what happens in the stock market has no economic foundation — it is rooted in investor mood swings. So we need to focus on investor psychology. What is different about investor psychology today that we have been able to keep stock prices up at super high levels for longer than ever before? That is what you are asking.
A book could be written on this question. But I think that the basic thing that is going on is that people are scared. An irony of economic progress is that, the richer people are, the more vulnerable they are to setbacks. Lots of people are okay with how they are living today. But they feel that they are on the edge. They do not feel secure. So they cannot even imagine how it would feel to experience a loss of 50 percent of their life savings, which is what we would see if today’s irrational exuberance were to disappear, as it must if the market is to continue to function.
So they block the thought of those losses out of their mind. So long as people do not think about the losses, they cannot take steps to avoid them. So people are not lowering their stock allocations. Which is what we would need to see for prices to come down. We are scared and paralyzed. If we were to act in our own best interests, we would lower our stock allocations. Doing that would bring on the price crash that we fear. So we don’t act. We cross our fingers and hope for the best.
I don’t favor this approach. I believe that it would be better to face our problems frankly. Then we could manage a price drop and keep it from getting out of control. But I am not seeing any signs that we are going to manage things. We are going to put off the day of reckoning just as long as we can. Then when it comes, we will panic. Not ideal. But panic is a natural result when we set things up so that the huge price crash comes as a surprise.
Think about an alcoholic, Anonymous. Say that at age 30 all bis friends predict that his life will crash by ago 40. But it doesn’t happen. The guy is very talented and has a will of steel. He makes it to 54. He still is in great danger of seeing his life fall apart but it hasn’t happened yet. To what would you attribute the long delay in his coming to terms with his alcoholism? I would say it is fear. The longer his addiction remains in place, the harder it is for him to fix his marriage and his career and his friendships and his health and his financial affairs. It doesn’t get easier over time, it gets harder.
But of course sooner or later he has to set things right. While it become harder to fact the addiction as time passes, it also become more imperative that the job be completed. We are deep into a price addiction today. It has gone on so long that it has become very, very hard even to think about what it would mean to permit prices to return to reasonable levels. But we know somewhere inside that we have no choice but to let this happen. But as of today, the thought is — put it off, put it off, put it off. It’s been like that for a long time now.
I hope that that helps at least a tiny bit.
Rob
Anonymous says
“An irony of economic progress is that, the richer people are, the more vulnerable they are to setbacks.”
You couldn’t be more wrong. Rich people got where they are for a reason. They know what it takes to get rich. Further, they usually take steps to protect themselves through diversification. Once you hit a certain level of wealth, your goal is to then protect it.
People that have not done well financially will fall for get rich quick schemes, like market timing, playing the lottery, etc.
Rob says
People could’t have known that Buy-and-Hold was a scam until 1981 because the Nobel-prize-winning research showing that market timing is required wasn’t published until then. So say that someone started following a Buy-and-Hold strategy in the 1980s and became very wealthy as a result. This happened to millions of people. You say that, once people achieve wealth. they want to protect it. That’s why we are where we are, Anonymous.
All of the people who achieved great wealth by pretending that irrational exuberance is real want to retain that wealth. If they permit someone like me to go around explaining why that wealth is not real, people will sell their stocks, prices will fall and the wealth will disappear. People who achieve wealth by treating irrational exuberance as real are highly vulnerable. All that it takes is honest and open discussion of the last 39 years of peer-reviewed research in this field for their wealth to disappear. Shiller’s amazing research has so far only convinced 10 percent of the population because 90 percent of the population views that research as a threat to their financial well-being.
Shiller’s research shows that 50 percent of the value of the stock market today is cotton-candy nothingness. That’s a big deal. A very, very, very big deal. Our nation will never be the same again once we open the internet up to honest discussion of Shiller’s Nobel-prize-winning research. In the short term, there will be great pain. In the long term, we will achieve a huge economic advance. Because once we all understand how stock investing works in the real world, we will never let one of these crazy bull markets get so out of control. But for now, a lot of us just want to protect the wealth that we are counting on to finance our retirements. That’s why we have seen the frictions that we have seen for the past 18 years.
If Shiller is right, the phony wealth is going to disappear no matter how hard we fight to hold off that day. At that point, there’s no longer much point in us lying to ourselves about it, is there? Once the phony wealth is gone, what are we protecting? That’s why I believe that we are going to see a huge advance in the days following the next price crash.
Rob
Anonymous says
Do you know any wealthy people? Do you know how they achieved their level of wealth? Do you understand as to how they maintain their wealth? Your comments indicate that you have no real experience or exposure in this area and have no idea what you are talking about.
Rob says
I read Shiller’s book, Anonymous. So I have an understanding of how stock investing works that the 90 percent of the population who either did not read it or who did not incorporate what they read into their understanding of how stock investing works does not possess. That’s pretty much it. Buy-and-Hold is today the dominant model for understanding how stock investing works. Shiller discredited the dominant model by showing that irrational exuberance is a real thing. The Buy-and-Holders don’t want us all to move on. They want to keep us all trapped in our 1980 understanding of how stock investing works. I want to see every discussion board and blog on the internet opened up to honest posting so that we can all move on and live richer and more fulfilling lives from this point forward.
Does irrational exuberance exist or not? That’s the dispute. If it exists, every investor needs to take it into consideration with every investment decision he makes. If irrational exuberance exists (I believe it does), market timing is absolutely crucial. If irrational exuberance exists and a large percentage of the populations comes to believe that market timing is not required, we are eventually going to experience an economic crisis. That’s not good. Economic crises hurt humans and other living things.
My sincere take.
Rob
Anonymous says
We are talking about rich/wealthy people. Try and follow the conversation. Your comment about rich people being more vulnerable to setbacks is totally wrong. Rich/Wealthy people know how to build wealth, but they also have a different mindset when they achieve a certain level. They are focused on wealth protection and they have a very diversified. Their portfolio goes way beyond just S&P 500 stocks. The wealthy have gone through good markets and bad and they have a much greater ability to withstand downturns. In fact, it doesn’t impact their lifestyle one bit. I am one of these people and I have many people in my circles that are also in this position.
It is funny how people like you that lack wealth act like you know what we think or do with our investments.
Rob says
People who have never had anything don’t worry about losing what they have.
People who have something worry about losing it.
Accepting the truth about how stock investing works as revealed by the last 39 years of peer-reviewed research in this field tells millions of people who believe today that they have something that they are likely in the near future to lose a big portion of that something.
That’s the point, Anonymous. That’s a big deal. People are not neutral truth-seekers re these matters. People are terrified of the possibility that what their common sense has been telling them for a long time really is so and that the pure Get Rich Quick/Buy-and-Hold approach is not the answer. So they resist discussions of the last 39 years of peer-reviewed research in this field.
Will they let down their resistance after they have seen most of their life savings go “Poof!” I believe that they will. But we will just have to be a bit patient to find out for sure.
My best wishes to you.
Rob
Anonymous says
Rob,
You are moving the goal posts. Read again. You made the claim that rich people are more vulnerable. You are wrong. I have explained why. When someone has $10 million and the S&P has a drop, it does not have much of an impact on how they live. They are not “vulnerable” as you claim. In fact, they are in a position to capitalize on drops. Look at how the rich have profited off of every “crisis” including the current Covid-19 situation.
Rob says
I agree that someone who has $10 million in assets is not as vulnerable as someone who has $500,000 in assets. Absolutely.
The question that I explored in the blog entry is why the price crash has been so long deferred. I wrote that one big factor is that as a nation we are richer today. It’s not just people who have $10 million in assets who are richer, people who have $500,000 in assets are richer too. People in both camps want to hold on to what they’ve got and the last 39 years of peer-reviewed research is perceived by them to be a threat to their ability to do that. If those people has not built nice lives for themselves, they would not care as much and they might have permitted the crash to take place back in 2006, as Shiller predicted.
As we have become a richer nation, it has become more difficult to make the transition from a bull market to a bear market. Shiler was using data from earlier time-periods to form his prediction. That data obviously did not reflect the increased wealth that we have all enjoyed in more recent decades of our history. Increased wealth is a good thing. But it makes us more anxious about stock price crashes. And thereby causes bull markets to last longer and to be more destructive when they arrive.
Rob
Anonymous says
“I agree that someone who has $10 million in assets is not as vulnerable as someone who has $500,000 in assets. Absolutely.”
Read you headline again. You need to change it.
Clearly, the $10 million guy knows what he is doing. I am one of these people and I know many others. We buy and hold in our stock portfolios because we know it works. I have seen to many fall for timing schemes, only to lose money. No thanks. I don’t want any part of the garbage.
Rob says
There’s nothing wrong with the headline. The blog entry directs itself to the question of why the price crash has been deferred.
If you feel the way you do about market timing, you should not engage in it and you should not encourage others to engage in it. But you are off base when you participate in criminal acts to block millions of people from learning about the 39 years of peer-reviewed research showing that market timing always works and is always 100 percent required for investors seeking to keep their risk profile constant over time.
My best wishes to you.
Rob
Anonymous says
“ I agree that someone who has $10 million in assets is not as vulnerable as someone who has $500,000 in assets. Absolutely.”
That is why I don’t go for those silly timing schemes. I go with what works, which is buy and hold.
Rob says
I certainly wish you the best of luck with it, Anonymous.
Rob
Anonymous says
“I certainly wish you the best of luck with it, Anonymous.”
No luck needed. It has already been accomplished. Why change when already successful.
Rob says
The Great Depression hurt lots of people. So did the stagflation of the 1970s. So did the economic crisis of 2008. The price crashes and economic contractions that are brought on through the relentless promotion of the pure Get Rich Quick/Buy-and-Hold approach to stock investing (no market timing! No price discipline!) are not “success.” We need to change. I think we will. We’ll see.
Rob
Anonymous says
If I was only sitting on $500K and was hoping that a get rich quick market timing scheme was going to save me, I would be very worried. However, If I am sitting on $10 million, with a successful buy and hold track record, I would be very comfortable because I know that market go up and down, but have always recovered from any drop.
Rob says
You’re entitled to your opinion, Anonymous. I say that a Great Depression hurts everyone. If we experience a Great Depression and the political turmoil that follows brings the political system down. that $10 million is not going to be able to buy you much comfort. We live in communities. Destroy the community you live in to turn a quick buck and in the end you hurt yourself as well.
Market go up and down. But there is no need for them to go up and down nearly to the extent that they do when the Buy-and-Hold stuff is being heavily promoted. If we permitted honest posting re the last 39 years of peer-reviewed research, I think we could limit the lows to a CAPE of 12 and the highs to a CAPE of 20. That would be a lot better than these crazy swings from 8 to 44 that have destroyed so many human lives.
Rob
Anonymous says
When did Shiller say that we are heading into a Great Depression? I also think we know which person is likely to be less impacted by a downturn. Hint: It is not the under-resourced market timing schemer.
Rob says
Shiller wrote: “”If, over some interval in the first decade or so of the twenty-first Century, the U.S. stock market is going to follow an uneven course down, as well it might – back, let us say, to its levels in the mid-1990s or even lower – then individuals, foundations, college endowments and other beneficiaries of the market are going to find themselves poorer, in the aggregate by trillions of dollars. The real losses could be comparable to the total destruction of all the schools in the country, or all the farms in the country, or possibly even all the homes in the country.”
The person positioned to do the best following a crash in which trillions of dollars of irrational exuberance disappears into thin air is the person with the smallest percentage of his wealth invested in irrational exuberance. That’s the market timer. That’s the Valuation-Informed Indexers.
Rob
Anonymous says
So you confirm that Shiller neve said we are heading into a Great Depression.
Rob says
He said that we could see dollar losses equal in size to the loss of all the homes in the country.
I vote to do what we can to avoid that.
Please feel free to quote me all over the internet.
Rob