“All That Would Be Lost If We Permitted Honest Posting Is the Crazy Ups and Downs That Have Characterized the Stock Market in the Pre-Shiller Era. A Steady Return of 6.5 Percent Real, Without the Economic Crises That inevitably Follow When Large Numbers of Investors Are Persuaded to Forsake Market Timing (Price Discipline!) Sounds Just Fine to Me.”

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

It has everything to do with what we are talking about.  We are talking about what has really happened in the past versus what was predicted to have happened.  If your predictions came true, you would be using those as proof of your predictions having come true.  However, since things didn’t turn out how you said they would, you want everyone to ignore the results and say that it is all pretend money.  You can’t change the past just to support your narrative.

There were predictions that Shiller made that did not prove out and there were predictions that I made that did not prove out. You are right that, if the predictions has proven out, I would cite that as evidence (not absolute proof) in support of Valuation-Informed Indexing. You are wrong that I do not want people to ignore the failure of the predictions. I think it is important that people know about that. I DO think that all stock gains above those that support a CAPE value of 16 are Pretend Money. The point of Valuation-Informed Indexing is to distinguish real economic gains, which can be used to plan one’s future, from phony irrational-exuberance gains, which do not have lasting value.

If those gains are really the product of irrational exuberance, as Shiller’s Nobel-prize-winning research indicates, they are still going to disappear into thin air. Knowing precisely when that will happen is less important in my eyes than knowing that it will sooner or later happen. If it turns out that Shiller is right (I believe he is), we are going to see millions of failed retirements and hundreds of thousands of failed businesses and millions of workers thrown out of their jobs and an increase in political frictions. None of that is required. If people had access to accurate, honest, research-based investment advice, we could never again see the CAPE value reach the level where it resides today. Stocks would be an amazing asset class offering annual returns of 6.5 percent real. All that would be lost if we permitted honest posting is the crazy ups and downs that have characterized the stock market in the pre-Shiller era. I can do without that stuff. A steady return of 6.5 percent real, without the economic crises that inevitably follow when large numbers of investors are persuaded to forsake market timing (price discipline!) sounds just fine to me.

That’s where I’m coming from, Anonymous.

Rob