I’ve posted Entry #536 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Hill-and-Valley Pattern of Stock Prices Is Strong Evidence That Shiller Is Right.
Juicy Excerpt: I believe that a factor that is not given sufficient attention is the way in which prices have always headed upward for a long stretch of time and then downward for a long stretch of time. If the market were efficient, prices would play out in the form of a random walk. But that is not at all what we see when we look at the historical return data. It’s not just that the data shows a strong correlation between valuations and long-term returns. The pattern in which prices play out supports Shiller’s idea that it is shifts in investor emotion that drive stock price changes rather than economic developments. Investor emotions are slow to change. Once the idea gets locked in that prices will he headed upward, irrational exuberance rules the day for a large number of days Then, once the idea gets locked in that prices will be headed downward, irrational depression rules the day,
The market does not stay in the valley, nor can you predict the timing of the valley. It didn’t work for you and you missed out on the largest Bull market we have ever seen. Your retirement failed.
Telling someone that he “missed out on the largest bull market we have ever seen” is like telling him that he “missed out on the largest nuclear war that we have ever seen” They don’t call it a bull market unless it contains a mountain of irrational exuberance. Irrational exuberance is not backed by anything of economic significance, just runaway investor emotions. So it doesn’t last. It is Pretend Money. Investors want to believe in the Pretend Money. They become addicted to it and defensive when they hear challenges to its reality advanced to them. Believing in irrational exuberance makes financial planning impossible. It is a huge wealth destroyer. Please spare me from excessive participation in out-of-control bull markets.
Stocks produce genuine economic gains of 6.5 percent real per year. I can live with that. I feel no great desire for the pretend, emotional, bull market, Buy-and-Hold stuff.
Stay the Course!
Rob