I’ve posted Entry #602 to the weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The First Step to Getting Better at Stock Investing Is Wanting to Get Better.
Juicy Excerpt: The primary emotion that most people have about stock investing is a defensive one. They don’t want to mess up. That makes people want to follow the crowd. One investor said it to me quite bluntly. I argued that, if Shiller is right that irrational exuberance always disappears into the wind in time, things look bad for stock investors when stock prices are as high as they are today. He didn’t argue with me that prices are not high or that the irrational exuberance will not disappear into the wind in time. But he showed no willingness to lower his high stock allocation. He said that, if stock prices crashed, he would be in the same boat as millions of others and he could live with that.
Thanks again for your daily reminder that you alone are right and everyone else is wrong. It must be difficult to find time to educate us morons when you have all those speaking engagements, book tours, etc, not to mention, the burden of managing your upcoming $500 million windfall.
Shiller wouldn’t have been awarded a Nobel prize if I were the only one who believed that his research showing that valuations affect long-term returns (and that thus there is precisely a zero percent chance that a pure Get Rich Quick/Buy-and-Hold strategy could ever work for a single long-term investor) is legitimate research. It’s about 10 percent of the population that believes that. We are going to have to get that number up if we are going to avoid future Buy-and-Hold Crises (it’s probably too late for the next one but we can avoid further crises after that one by getting the word out). I believe we will do it.
We all have a little bit of moron in us or else today’s CAPE value would not be 29. Shiller is trying to help us become more aware of what makes stock investing risky (price-indifferent investment strategies!). But the message doesn’t stick when we only hear it once in a great while. Are we all “morons” because we all want to eat too much chocolate cake and not stick to a balanced diet? We are flawed. Regular remineders help us avoid going too heavy on the chocolate cake. It works the same way with stock investing and with our human weakness for price indifferent/Buy-and-Hold investment strategies. Irrational exuberance tastes sweet in the moment. It’s only when we see how much harm it has done to millions of humans that we can reflect on how much better off we all would be if honest posting re the last 41 years of peer-reviewed research were permitted (and encouraged!) at every discussion board and blog.
My sincere take.
Rob