“A Big Part of the Problem Is That You DO NOT WANT TO KNOW How Stock Investing Works. You Prefer Not to Know to Being Confronted With Mistakes That You Have Made in the Past.”

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

“I don’t quite follow what you are getting at when you say that Shiller has positioned himself to be right no matter what happens.”

Obviously, if the market crashes, Shiller says classic CAPE was right. If the market soars, he says Excess CAPE Yield was right.

And as always, you ignored my simple question. Why is CAPE everything, but ECY is nothing? They both come from the same Nobel Prize winner.

To some extent, I agree with you re this one. I think that everyone (Buy-and-Holders and Valuation-Informed Indexers alike) should be holding Shiller (and all others, to be sure) accountable. We are 19 years into this and we have not yet seen Shiller asked “Is the safe withdrawal rate a constant or it is a number that varies with changes in valuation levels?” We should know what Shiller and everyone else thinks about that question.

And we should know what stock allocation Shiller thinks is best when prices are at today’s levels. He has written that stocks are more dangerous than usual at today’s prices but also that things aren’t as bad as people like me suggest they are. The way to clear up the confusion is to ask him what allocation level he thinks makes sense. You Goons started asking me specifics like that on the morning of May 13, 2002. It is a good way to sharpen one’s understanding of what a person is saying. We should all be doing that with Shiller. And of course we should have been doing it with Bogel when he was alive. Bogle said in one post that he could see how Valuation-Informed Indexing could work. He should have been asked to square that statement with his many statements that market timing doesn’t. You Goons were very, very quiet when Bogle said that he could see how Valuation-Informed Indexing could work. A big part of the problem is that you DO NOT WANT TO KNOW how stock investing works. You prefer not to know to being confronted with mistakes that you have made in the past.

I wrote an entire column on the Excess CAPE YIeld stuff. I do not think it is nothing. But it certainly does not make me feel more comfortable about today’s stock prices. It makes me feel LESS comfortable. Today we have huge pressures for stock prices to fall over time and also huge pressures for interest rates to rise over time (which would bring stock prices down even more). That’s the worst of all worlds. I don’t think that Shiller covered himself in glory in the article in which he used the Excess CAPE yield concept to “justify today’s stock prices.

That said, yes, he IS a Nobel prize winner. So I think it is important that people listen carefully to what he has to say re these matters. The fact that the guy who is the leading advocate of the idea that valuations matter would say these things is a big deal and it counts in favor of the Buy-and-Hold position. I think that the answer is for everyone to join in the debate. We need to hear the positions of both sides expressed with the full strength with which they are felt. It’s theoretically possible that Shiller is right re this matter and that I am wrong. I don’t think so. But then, I wouldn’t, would I? Each investor needs to be exposed to both sides and to think the matter through and then to invest pursuant to the conclusions that he arrives at as the result of hard thinking about the matter. That’s the best that us flawed humans can do in this flawed world that we live in.

No one has all the answers. Not me. Not Shiller. Not Bogle. Not Lindaeur. Not Greaney. Not Pfau. We all need to give it our best shot and we all need to agree to abide by the laws of the country we live in when engaging in discussions re these matters. That’s the answer. I am sure.

Rob