Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
In short, you NEED the entire market to trade how you want it to trade in order for your timing scheme to work out, but you are broke because people won’t do what you say. Got it.
I need the market to move in the direction of rationality (which is what price discipline is) for my choice to follow a rational investing strategy to pay off. That’s so.
It always has. We have had the market go to crazy price levels before. This is not the first time. It has ALWAYS returned to rationality/fair pricing.
If you reflect on it a bit, you wll see that that must always continue to be the reality. If people could just push stock prices to whatever they wanted them to be with no concern for the economic realities, no one would ever need to work again. We could just push stock prices up to 10 times their fair value and be done with it. That can’t possibly be the way it works. Believing in Buy-and-Hold is like believing in a perpetual motion machine. I mean, come on.
I do not “want” the stock market to behave in the manner that Shiller’s Nobel-prize-winning research shows that it has always behaved. My personal desires have nothing to do with it. What I want is to discuss with millions of my fellow investors HOW IT IS, how the stock market has always behaved in the past. I believe that it is very much a live possibility that the way the market has always behaved in the past is the way that it will continue to behave in the future. The purpose of research is to show us all how it has always behaved. Without access to research (and the ability to discuss it on a daily basis), we have an inclination to get caught up in our Get Rich Quick/Buy-and-Hold fantasies and bring on an ocean of human misery for millions of investors.
Shiller showed that humans are just as emotional when engaged in stock investing as they are when engaged in any of the other activities that they enage in. But he also showed that they are not entirely emotional. If they were, we could push prices up to where they are and not see them collapse in the following days. We could have thrilling bull markets that did not bring on frightening bear markets. Humans are highly emotional but they are also fully capable of some degree of rationality. The entire history of the stock market shows that.
The question on the table is — Should investment experts do everything in their power to push the emotionalism to the max (to create as much irrational exuberance as possibe) or should they mix in some discussion of the last 41 years of peer-reviewed research so that the horrors of the Buy-and-Hold Crises are not quite as bad in the future as they have been in the past? I am a strong advocate of permitting discussion of the peer-reviewed research at every site. Depressions and Great Recessions hurt human beings in very serious ways. I have grown fond of a good number of the humans over time. Some of them are quite likeable when you get to know them.
Rob
You think you are rational?
I try to be rational. All human investors have the capacity to be rational but also have an inclination to give in to Get Rich Quick/Buy-and-Hold urges. The value of research is that it helps us to see the dangers of going with a pure Get Rich Quick/Buy-and-Hold approach. That’s why I say that we should permit honest discussion of the last 42 years of peer-reviewed research at every site, without a single exception.
The more rational we all become in our investment choices, the fewer bull markets we will see and the fewer bear markets we will see and the fewer economic crisies we will see. Today’s CAPE level is the result of the ongoing ban on honest posting re the peer-reviewed research. The more we all were encouraged to practice effective market timing, the less voatility we would see in stock prices and the more stable our economic system would be.
Rob