“One Significant Difference Between Shiller and Me Is That He Directs a Lot of Energy to Describing the ‘Narratives’ That Investors Use to Form Their Stock-Buying Decisions. I See Narratives as Being Primarily an Exercise in Rationalization. People Decide What They Want to Do for Emotional Reasons (Greed Pushing Prices Up and Fear Pushing Prices Down) and Then Turn to Things Like Narrative to Justify Their Choices.”

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

Robert Shiller once again says you are wrong:

https://www.cnbc.com/2020/12/15/robert-shiller-calls-stocks-highly-priced-but-wouldnt-cash-out.html

He does not mention anything about a stock crash. In fact, he says that the market is not so high that he wouldn’t consider it an investment.

Thanks much for the link.

There is nothing that Shiller said in that interview with which I would disagree. There’s no valuation level at which I would say that people should not consider stocks as an investment. So I certainly agree re that one. And I of course agree that stocks are highly priced.

I would convey more worry in my tone, that’s for sure. This is not a time for complacency. The CAPE level is alarming. So, while I don’t disagree with Shiller’s statements, I do take issue a bit with his tone.

One significant difference between Shiller and me is that he directs a lot of energy to describing the “narratives” that investors use to form their stock-buying decisions. I see narratives as being primarily an exercise in rationalization. People decide what they want to do for emotional reasons (greed pushing prices up and fear pushing prices down) and then turn to things like narrative to justify their choices. It doesn’t hurt to mention the narratives. I don’t object to the discussion of them. But I would not put as much focus on them as Shiller does.

I wish that the people who interview him would ask him what stock allocation he would suggest for the typical investor. I would say “30 percent stocks” at today’s prices. Shiller often says what he says here – that people should not cash out. That doesn’t tell us anything. It is never a good idea to cash out. But it certainly doesn’t make any sense to be going with the same stock allocation today as you would go with if stocks were priced at reasonable levels. I wish that interviewers would try to get him on the record re that one.

I don’t know what Shiller would say to that question. My sense (from other interviews that I have seen with Shiller) is that he almost always goes with mostly stocks himself. My sense is that he moves to different market segments when prices in the broad U.S. market get too high. Or he invests in non-U.S. markets. I am okay with that. I don’t think it is a dumb idea. But I have doubts whether it is the right approach for the investor who does not want to spend a good bit of time researching this stuff. I think it is better for that investor to keep things simple and to go with a lower stock allocation at times when prices are insanely high. Shiller may know enough to be able to protect himself without getting out of stocks altogether. But I don’t think that that is so for the typical middle-class investor.

He certainly never said anywhere in that interview that I am wrong to believe that irrational exuberance is a real thing. His entire life’s work shows that he agrees with me re that one. And that is the one that matters. If irrational exuberance is a real thing, the safe withdrawal rate is a number that changes with changes in valuation levels and the entire Buy-and-Hold Model is dangerous stuff. I have never seen Shiller say anything to make me think that he does not believe that irrational exuberance is a real thing. But I certainly think it would be a good idea if he put more focus on the dangers of Buy-and-Hold.

I think that everyone in this field should be speaking out on that one. Those who still believe in Buy-and-Hold should of course say what they still believe. Everyone should be posting honestly. But everyone should be acknowledging the elephant in the living room — the 39 years of peer-reviewed research showing that stock investing risk is not constant but variable and that therefore market timing must always work and is always required for investors who seek to keep their risk profile constant over time.

My best and warmest wishes to you and yours.

Rob