I’ve posted Entry #598 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Valuation-Informed Investing Strategies Are an Exercise in Time Travel.
Juicy Excerpt: The portfolio statement number controls today. But Shiller’s research reflects how the market has been working since the day it was founded. Irrational exuberance doesn’t last. It’s not the portfolio statement number that controls tomorrow. It’s the portfolio statement number reduced by the amount of irrational exuberance present in the stock market price that controls tomorrow. Believing that valuations matter is an exercise in time travel.
Most of your net worth is now tied up in your house. Shiller says housing prices are in a bubble. Are you going to sell your house now?
I don’t think that stock bubbles are good and I don’t think that housing bubbles are good. Anytime that we start believing that our accumulated wealth is more or less than what it is, we hurt ourselves by making it harder to engage in effective financial planning.
I 100 percent favor permitting honest posting on the last 41 years of peer-reviewed research, which helps us all to understand how the irresponsible promotion of Buy-and-Hold “strategies” (no market timing now!) causes irrational exuberance to take over our portfolios. When irrational exuberance is diminished, the problem of housing bubbles is diminished too because people do not have pretend money to use to bid up housing prices too high.
It’s hard to think of a bad situation that is not alleviated to at least some small extent by permitting honest posting re the last 41 years of peer-reviewed research in this field at every site on the internet, without a single exception. Don’t like climate change? We are better able to address a problem like climate change when we live under a more stable economic system. Permitting honest posting re the peer-reviewed research means bringing an end to bull markets and bear markets, which stabilizes our economic system. Don’t like to see crazy people shooting innocent people? The bear markets brought on by the relentless promotion of Buy-and-Hold/Get Rich Quick investment “strategies” cause millions of people to lose their jobs and losing a job can cause psychological problems.
And on and on and on. Shiller was awarded a Nobel prize because his work is of great value. We should be talking about its far-reaching implications at every site on the internet, without a single exception. Every time a huge advance is achieved, the people who built careers based on the old understanding of how things work need to acknowledge that they didn’t always know it all. It’s better for them to do that quickly than to drag their heels because dragging their heels causes word of the advance not to reach as many people as soon as possible. Which means that those people miss out on living better lives as a result of the huge advance.
My sincere take.
Rob