I’ve posted Entry #567 to my weekly Valuation-Informed Indexing column at the Value Walk site, It’s called Shiller’s Research Doesn’t Permit Us to Predict the Future, It Permits Us to See the Present More Clearly.
Juicy Excerpt: The reality is that Shiller’s research does not permit us to predict the future, it permits us to see the present more clearly. Shiller showed us the need to make a distinction between stock gains rooted in economic realities (such as increased productivity) and stock gains rooted in nothing more than irrational exuberance. Stock gains rooted in economic realities last forever and can be counted on when one is planning one’s financial future. Irrational exuberance gains are fake and temporary. They disappear into the mist when investor emotions swing in a new direction.
“ The reality is that Shiller’s research does not permit us to predict the future, it permits us to see the present more clearly. ”
But you said Shiller’s research tells us that there will be a stock market crash. Isn’t that predicting the future?
Say that someone learns how to drive a car and determines for himself that going at a speed of 60 miles per hour suits him. Then one day there is ice on the road. He wonders if perhaps he should lower his speed. He consults one friend who is a believer in the Buy-and-Hold approach to car driving. This friend days: “Oh, you must continue driving 60 miles per hour on the ice. We have no way of knowing precisely when you will crash. We of course know that sooner or later you WILL crash. But that’s irrelevant. The important thing is that we cannot say precisely when you will crash. So you just must continue driving at what is now an insanely risky speed until you actually do crash and possibly kill yourself.” If he has a more sensible friend who advises him to drive at a lower speed when there is ice on the road, the Buy-and-Hold friend threatens to kill the sensible friend because he knows that, if sensible advice can be heard, he will no longer be perceived as an “expert” on car driving.
The market is always going to get prices right sooner or later. That is what markets do. A CAPE of 17 is a long ways down from a CAPE of 38. So it is insanely dangerous for an investor to be going with the same stock allocation today that made sense when the CAPE was 17. But, no, no one can predict effectively when the price crash will come. The Buy-and-Holders conclude that no one should tell investors about the insane level of risk that they are taking on by continuing with their old stock allocation. I say that we should permit honest posting and let each investor decide for himself or herself what to do with his or her retirement money. The Buy-and-Holders should not be permitted to employ criminal tactics to silence voices who believe that Shiller’s Nobel-prize-winning research is legitimate research. To permit that would be to invite catastrophe when the inevitable price crash arrives.
That’s my sincere take, Anonymous. My best and warmest wishes to you and yours regardless of what investment strategy you elect to pursue.
Rob
Predicting a crash is predicting the future. You seem look for ways to spin the same old stories without thinking about how you make opposite claims.
Even the Buy-and-Holders say that there will be another price crash someday. That is a trivial observation. It is just common sense.
What I say that the Buy-and-Holders do not say is that the risk of a price crash is far higher when the CAPE is 38 than it is when the CAPE is 17 and that investors should take that reality into consideration when setting their stock allocation (that is, they should engage in market timing with the aim of keeping their risk profile constant over time and thereby staying the course in a meaningful way}.
There is no need to engage in predictions to invest effectively. There is a need to pay attention to the increased risk IN THE PRESENT in stock investing at times when the CAPE value has risen to insanely dangerous levels.
The CAPE value is known and the CAPE value tells you how much risk you are taking on. There is no need to make predictions.
Rob