Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
So that prediction was wrong. But you still didn’t answer my question. When has Shiller predicted the next crash?
The title of his book is “Irrational Exuberance,” Anonymous. To say that irrational exuberance exists is to predict a price crash whenever stock prices get out of hand. At the time when Buy-and-Hold was developed, the dominant academic theory re how stock investing works was the Efficient Market Theory. If the market is efficient, stock prices are set by a rational process and the risk of a price crash is the same at all times. If there is such a thing as irrational exuberance, the risk of a crash increases with increases in prices. A high CAPE level always predicts a price crash to someone who believes that Shiller’s Nobel-prize-winning research is legitimate research.
Rob
So if a crash occurs 50 years from now, it is because of buy and hold and that it met your predictions, right?
Price crashes are a very weird phenomenon, Anonymous. $8 trillion of spending power was subtracted from the economy in the 2008 crash. I don’t buy any purely economic explanation that is put forward to explain that. There were some economic developments that triggered it, I don’t deny that. What I say is that there was nothing that happened that explained the loss of $8 trillion of spending power. That is a very big number.
I think that we need to do a better job of explaining what is going on when prices crash. I think that Shiller’s Nobel-prize-winning research provides very, very important clues. I think that we should be talking about his research findings at every discussion board and blog on the internet, without a single exception. If there really is such a thing as irrational exuberance, that would fully explain crashes. In irrational exuberance exists, crashes are inevitable. If irrational exuberance exists and we are telling people not to engage in market timing (many of us are), we are CAUSING crashes (and the economic crisis that follow from them).
If we don’t see a crash for another 50 years, that development will need to become a part of the conversation. It hasn’t happened yet. As of today, that is a hypothetical. But, if it happens, that would certainly be something that those trying to advance our understanding of these matters would need to take into consideration.
It all comes down to whether the market is efficient (this is what was believed at the time the Buy-and-Hold strategy was developed) or whether irrational exuberance exists (this is what Shiller’s Nobel-prize-winning research shows). I believe that Shiller’s Nobel-prize-winning research is legitimate research. I advocate market timing for all. I say that it is 100 percent essential to keep the market functioning properly. No market can function without price discipline and market timing is the means by which people who buy stocks practice price discipline.
Rob
“$8 trillion of spending power was subtracted from the economy in the 2008 crash”
and then it was quickly added back into the economy. We don’t know if and/or when there will be another crash. However, we do know that if a crash occurs, it has always come back and has gone on to new highs. That is why buy and hold has always worked and timing has yet to work.
I agree that the spending power that was lost in the 2008 crash was added back when stock prices shot back up again in late 2009. All that means is that we created more irrational exuberance. The CAPE value today is worse than what it was prior to the 2008 crash. We are now where we were just prior to the Great Depression.
Is that a good thing? I see it as a very, very, very bad thing. I oppose irrational exuberance. That’s why I advocate market timing.
Market timing has worked for as far back as we have good records of stock prices. The peer-reviewed research that I co-authored with Wade Pfau shows that beyond any reasonable doubt whatsoever.
After the crash, the market will eventually go on to new highs. That’s certainly so. But we would all be better off if we practiced market timing and never permitted prices to get so high as to cause a price crash. Prices crashes cause hundreds of thousands of businesses to fail and millions of people to be thrown out of work and millions of retirements to fail. Now that we know how to prevent price crashes, we should all be working together to achieve that goal. The first step is opening every discussion board and blog on the internet to honest posting re the last 40 years of peer-reviewed research in this field, without a single exception.
I naturally wish you all good things, Anonynous.\
Rob
“After the crash, the market will eventually go on to new highs.”
That is why buy and hold has always worked.
We don’t know if and when a crash will happen and that is why timing has always failed.
I agree that we do not know precisely when a crash will arrive. That would require short-term timing, which doesn’t work.
But I don’t agree that there is some sort of “if” as to whether we will see a crash and the economic crisis that will inevitably follow from it once we let stock prices rise to the level where they reside today. The only way to prevent that is to encourage all investors to practice market timing. Let investors know what is in their best interest and they will pursue it. Stock prices are self-regulating in a world in which all investors are practicing market timing.
Again, market timing has worked for as far back as we have good records of stock prices. Wade Pfau and I showed that beyond any reasonable doubt in the peer-reviewed research that we co-authored. We should be discussing that Bennett/Pfau research at every site on the internet. Wade holds a Ph.D. in Economics and he was absolutely stunned over what he learned during the 16 months in which he was working with me. He had heard so many people say that market timing doesn’t work that he assumed that there must be research showing that. But of course what he discovered is that there is not one iota of research showing that. It was an assumption, not a finding. Shiller discredited that assumption with his Nobel-prize-winning research.
We need to open every site to honest posting re the last 40 years of peer-reviewed research in this field, without a single exception.
My sincere take.
Rob
But you are relying on a crash, which means that is has to take place at some point in time. What if it doesn’t happen during your window of time? In 2005 when you gave an update on your retirement plan, you were already off on your numbers and you said that you weren’t worried as you will make up for it after the next crash. That still hasn’t occurred, so you haven’t gotten back in. Now we are all the way into 2021 and you have to go back to work.
I am at zero stocks. But that’s only because I am starting a business. So it does not make sense for me to take on the same level of risk as the average investor. I recommend that the average investor lower his stock allocation from 60 percent to 30 percent when stocks reach insanely high valuations. You can’t fall too far behind playing it that way. Price crashes are devastating. By lowering your stock allocation, you protect yourself from them. Buy by going with a 30 percent stock allocation, you still benefit from any upside movement during the time when you have lowered your stock allocation.
I am not relying on a crash. I will make money from my journalism work regardless of whether there is a crash. I expect to obtain a $500 million settlement check when the internet is opened to honest posting. That’s far more than I could have obtained investing in stocks. It’s not a close call. Getting behind Valuation-Informed Indexing prior to the crash is the opportunity of ten lifetimes. I urge everyone to do it.
I have to go back to work because of your criminal behavior, nothing else. But I obviously can bring lawsuits against anyone who engaged in criminal acts in the days following the next price crash. I won’t have to take on any corporate employment once every site on the internet has been opened to honest posting. I’ll be riding high. And I will have helped millions of people getting there. That’s doing well while doing good.
Permitting honest posting is the answer, Anonymous. I am 100 percent sure.
Rob