Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
You already admitted in another thread that timing didn’t work when you said:
“Going by the historical, the crash should have arrived 14 years ago. You’ve got me re that one, Anonymous. We are living through something unprecedented. It’s scary.”
You’re saying that the timing did not work in the short term. I acknowledge that it didn’t work in the short term. But I do not advocate short-term timing. I advocate long-term timing.
The reason why market timing is essential is that irrational exuberance is a real thing. Irrational exuberance is a terribly destructive force (it is responsible for nearly 70 percent of the risk of stock investing, according to the peer-reviewed research that I co-authored with Wade Pfau). So we need a way to combat it. The only means available to us to combat irrational exuberance is market timing. So we want to do everything we can to encourage market timing.
You are saying that sometimes irrational exuberance persists for a long time. That is so. We have never before seen irrational exuberance persist for as long as it has in this current bull market. That’s why it is so imperative that we open every discussion board and blog on the internet to honest posting re the last 40 years of peer-reviewed research in this field. Doing that will help us pull stock prices down. Failing to do it will permit them to remain high for an even longer time.
Any market timing that people engaged in a few years ago to bring stock prices down did not “work” in the sense that stock prices are still insanely high. But it was a noble effort. If we had been able to bring prices down a few years ago, millions and millions of people would have been able to do a better job of planning for their financial futures. People who should have been saving more but were fooled by the phony numbers on their stock portfolio statement would have saved more. Entrepreneurs who started businesses that they would have not started if the economy was not being artificially pumped out by the phony stock numbers would not have started those businesses (and thus would not have to see them fail with the next price crash). Politicians who were given credit for a good economy during the time the economy was being pushed forward artificially would have been assessed by voters more effectively. And on and on and on.
There is no possible benefit that comes from lying to ourselves about the value of our stock portfolios, Anonymous. Irrational exuberance is a terribly destructive force. We all should be doing everything in our power to keep it in check. That means engaging in market timing. We all should be engaged in market timing and we all should be encouraging our friends to engage in market timing.
To say that there might be some circumstance in which market timing might not work is like saying that there might be some circumstance in which driving sober did not work. If you drive drunk on a few occasions and survive the rides, it doesn’t follow that driving sober no longer works. Driving sober is always better than driving drunk. Practicing market timing (price discipline!) when buying stocks is always better than failing to practice market timing when buying stocks. It is not possible for the rational human mind to imagine any exceptions to the rule.
If the market were efficient, none of this would be so. But the market is NOT efficient. Shiller showed with his Nobel-prize-winning research.
Rob
Being wrong for the last 14 years sure would have killed a retired investor following VII.
What do you think it would do to a recent retiree to suffer a 75 percent decrease in value of his stock portfolio? We are at two times fair value. We have gone to one-half of fair value at the end of all previous bull/bear cycles. That’s a 75 percent loss.
Say that someone needs $1 million to retire and leaves his job having just that amount, with $800,000 in stocks. He loses $600,000. So he now has a total of $400,000 to live on for the rest of his life, $600,000 less than what he requires.
That’s devastating. That’s Buy-and-Hold, That’s what comes from discouraging market timing.
If we permitted honest posting, the CAPE could never rise to the levels where it is today. Stock prices are self-regulating in a world where investors are able to learn about the last 40 years of peer-reviewed research in this field. When prices get too high, people sell a hit, bringing prices back to reasonable levels. Investors still get the 6.5 percent real gains that are backed by economic realities. But we don’t see the crazy ups and crazy downs anynore.
I think honest posting should be permitted.
My best wishes to you.
Rob
“What do you think it would do to a recent retiree to suffer a 75 percent decrease in value of his stock portfolio?”
As the VII retiree. He didn’t get the advantage of the huge bull market and had to spend down a substantial portion of his retirement savings while waiting for the crash that never came.
There is no advantage to a bull market if irrational exuberance is a real thing. It’s pretend money. What the heck good is pretend money? Pretend money misleads you about where you stand. The bigger the bull market is, the more mislead you are. If you see that as a benefit, that’s where we disagree.
If the crash never comes, this will be the first time in history that that’s what happened. You could jump off the roof of your house on the thought that, even though you have never been able to fly before, maybe all that changed overnight, Anything is possible. But when it comes to my retirement money, I am inclined to take into consideration how things have been playing out for 150 years of stock-market history.
My best wishes to you.
Rob
You call it pretend just to make yourself feel better after missing out on the bull market enjoyed by the Buy and Hold crowd. Meanwhile VII investors now have to work much longer to make up for the poor performance.
I call it pretend because I believe it is pretend. I don’t view irrational exuberance as something you can “miss out on.” I view irrational exuberance as something you try like heck to AVOID.
I naturally wish you all good things.
Rob
The value of anything is based on how much someone is willing to pay you for something at that given time. To say otherwise, would be untrue. You have no knowledge of what anyone else owns in their portfolio, but you make broad sweeping statements as if you are an authority. Unfortunately for you, your track record has taken away any credibility you think you might have.
Markets don’t work when access to a free flow of information is blocked, Anonymous. If we permitted honest posting re the last 40 years of peer-reviewed research, investors would act in their self-interest and engage in market timing and today’s CAPE would be somewhere near 16. You cannot say how much someone is willing to pay when you deny that person the information he needs to make an informed purchasing decision.
My sincere take.
Rob