Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
The buy and holder has the money in his portfolio. The VII investor does not. I would rather be the one with the money vs the one that is just hoping to get some money.
The Buy-and-Holder does NOT have the money in his portfolio. That’s the entire point of Shiller’s research. That’s why the subtitle of his book describes his work as “revolutionary.” The Buy-and-Holder has irrational exuberance in his portfolio. Irrational exuberance is not real, lasting money. It is pretend, temporary money. Not the same thing at all.
It is important to know how much money you actually have. To do that, you must make an adjustment to the number on your stock portfolio to adjust for the effect of irrational exuberance. Whether or not one makes that adjustment determines whether he is a Buy-and-Holder or a Valuation-Informed Indexer.
Rob
Wrong again. The value is whatever your statement says that day. Ignoring taxes for a moment, if my account has $2 million, I can take that out and buy a house (or anything else) for up to $2 million.
You are of course correct that you could withdraw the money from your account on that day and get the full $2,000,000. But you can only count on half of that money to last into the future, The half that is backed by economic realities will last. The half that is rooted in irrational exuberance is not going to last, So you should not be making plans based on you having that amount of money in your possession.
Do you believe that gains that are the product of irrational exuberance are the same as gains that are backed by economic realities, Anonymous?
Rob
So now you do agree that the account is worth today what it says. But, in your world, once the stock drops, it will never recover. Got it.
No, it is not worth what it says. But there are people who will pay you that amount because there is a Ban on Honest Posting re the last 40 years of peer-reviewed research that has blocked most of us from coming to a good understanding of the far-reaching implications of Shiller’s Nobel-prize-winning research. Once we open ever internet site to honest posting, we will never see the CAPE level rise this high again.
It is wonderful that we now know for the first time in history how stock investing works in the real world. But that knowledge doesn’t help us in a practical sense until as a society we give ourselves permission to talk about it. Alcoholics know that drinking is destroying their lives in about 10 different ways. It is often the case that they cannot overcome their addiction until they join a 12-step group where they hear about the dangers of the addiction from other people on a regular basis. We cannot overcome our addiction to Get Rich Quick/Buy-and-Hold investing strategies by ourselves. We need to hear about the dangers of Get Rich Quick/Buy-and-Hold strategies from lots of other people on a daily basis.
Saying that there is no harm from going with a pure Get Rich Quick/Buy-and-Hold approach because someday in the future stock prices will go up again is like saying that there is no harm from losing your family and your job and your health to a drinking addiction because someday in the future you may be able to get another job and a new family and recover your health. We all get only so many years to live and so many years to finance our retirements. Giving up many of those years by following a pure Get Rich Quick/Buy-and-Hold approach is a huge negative.
Investment advisors should not be encouraging a pure Get Rich Quick approach. They should be encouraging investors to take the peer-reviewed research into consideration. But of course they are not going to do this until as a society we begin enforcing the laws against extortion and threats of physical violence the same in the investing advice field as we do in all other fields of human endeavor.
My sincere take.
Rob
I think the prices of homes in Purceville are pretend values. You are living in a cotton candy house. As such, you will soon be living in a van down by the river. Since I said it, it must be true.
In the housing market, sellers make the case for why the price should be high and buyers make the case for why the price should be low. For a transaction to be completed, there has to be a meeting of minds somewhere in the middle. So both the buyer and seller have an incentive to hear out the other guy. So the market is able to function.
It doesn’t work that way in the stock market. Not today. Many people put aside a portion of each paycheck for the purchase of stocks. Those people are buyers and will be for many years to come. They should be rooting for price drops. If prices dropped, they could buy more stocks for the same amount of money and retire much sooner. But when is the last time you heard someone rooting for stock prices to drop? It doesn’t happen. Sellers root for high prices and buyers root for high prices. There is no tension between the two sides. So there is no way for the market to arrive at the right price. The stock market is dysfunctional.
Now, the stock market gets the price right EVENTUALLY. It has to do that. That’s the core job of any market — to get the price right. But, once large numbers of investors come to follow a Buy-and-Hold strategy, it becomes impossible for the market to perform its core job. Prices go up and they do not come down for a long time. Until eventually the market just crashes them. That’s how the market overcomes the irrational unwillingness of investors to engage in market timing. It crashes prices. And we all suffer.
If we permitted honest posting, the stock market could function like other markets. Investors could become informed of the downside of buying stocks when they are insanely overpriced. So they would go to a lower stock allocation when prices got out of control. That would bring prices down to a reasonable level. You would still have steady gains of 6.5 percent real per year because those gains are supported by the economic realities. But you would not have crashes and the economic crises that follow from them. Because the market would be able to do its job of keeping prices where they should be. Permitting investors to know what the peer-reviewed research says is a critical part of having a functioning market. Investors cannot make rational choices unless they have access to good information.
That tension between people who believe that prices should be higher and people who believe that prices should be lower is what makes markets work. Take that tension away by directing threats of physical violence and acts of extortion at those who make the case for lower prices and you can no longer trust the market to get the price right. The market WANTS to get the price right. That’s why as a society we adopted laws against threats of physical violence and against acts of extortion. But the Buy-and-Holders do not follow those laws. And most of us do not insist on enforcement of them because we have a Get Rich Quick impulse within us that makes us sympathetic to the message advanced by the Buy-and-Holders (timing is not required!).
Timing is ALWAYS required. Timing is what makes the market work when it works. Taking away market timing from the stock market is like taking away brakes from a fast car. It guarantees a crash somewhere down the road a piece. Not good.
My sincere take.
Rob
Not according to Shiller. He often speaks of a housing bubble. You better get that van ready.
Housing prices can go into a bubble. But usually it is going to be a stock bubble that is the driver of the housing bubble. There is no ban on honest posting re housing prices that I am aware of. So you have to ask yourself, what would cause a housing bubble? Why wouldn’t the tension between buyers and sellers just produce the proper price (which is the entire point of a market)?
So long as honest discussion of the stock market is prohibited, a stock bubble will be created that will bring into existence trillions of dollars of Pretend Money. People think of the Pretend Money as real. That’s why the exuberance is irrational. Don’t you think that that is going to affect their thinking process re housing? If a person has enough money to afford a $300,000 house counting his stock holdings, he may feel fine offering to pay $250,000 for a house that he likes. He can afford it! But if half of the $300,000 is Pretend Money manufactured through a belief in Buy-and-Hold, he really cannot afford that house at all and will not offer to buy it.
Bubbles cannot be contained in a single market. Once Pretend Money is created, the bubble in the market in which it is created spreads to other markets. In time, it destroys our entire economic system. We all need to know how much money we have. And that becomes impossible once Buy-and-Hold stock buying strategies become popular and honest posting re the peer-reviewed research is prohibited.
We should be practicing price discipline in ALL markets. I do not know of any market in which the exercise of price discipline is discouraged except for the stock market. So the stock market is the driver of bubbles. We have to gain the ability to talk honestly about how stock investing works if we want all of our markets and indeed our economic system as a whole to work effectively.
My best and warmest wishes to you.
Rob
Housing bubbles can be driven by numerous factors, like interest rates. We also see prices now being driven up given Covid relocations. There are no bans on honesting (truthful) posting for either houses or stock. You can find any information out there you want.
Accurate information on how stock investing works is out there if you search hard for it. Shiller’s research is available. Shiler’s book is available. We know how stock investing works today. We have know for 40 years now.
But the hurdles to getting that information are very high. Look as how many people fell for the claims made in the Greaney retirement study. People just assumed that the study was legitimate because it was being discussed at a large discussion board and no one was challenging it. Do you think those people would have believed that the study was real if they knew about the criminal acts that Greaney engaged in to keep people from questioning it? I sure don’t. The entire reason why Greaney engaged in the criminal stuff was to keep people believing in the study. So the ban on honest posting makes a big difference.
If death threats don’t matter and if acts of extortion don’t matter, then why do we see Buy-and-Holders engaging in this type of behavior? I think it is because they see that it works. The Buy-and-Holders are in a horrible situation. They very much want to believe in Buy-and-Hold and they very much want other people to believe in Buy-and-Hold. But they know that there is 40 years of peer-reviewed research showing that valuations affect long-term returns and that there is precisely zero chance that a pure Get Rich Quick approach could ever work for a single long-term investor. What are they supposed to do?
I would like to see them let the Buy-and-Hold house of cards come tumbling to the ground. I think that that is what should have happened in 1981, when Shiller published his Nobel-prize-winning research. But the Buy-and-Holders don’t want that. They really, really, really want to believe that they are super smart for following this pure Get Rich Quick approach, which makes it look like they have a lot more money than they do. What are they supposed to do?
I am not saying that the behavior of the Buy-and-Holders is acceptable. I am trying to understand it I am putting it in a somewhat sympathetic light so that we can come to understand it a bit better.
Yes?
Rob
Nothing you say is accurate or factually based. It is just your opinion. End of story.
Okay, Anonymous.
I do wish you all good things, in any event.
Rob