“Valuation-Informed Indedxing (Market Timing!) Just Permits the Economic Realities to Assert Themselves More Quickly.”

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

How would “honest posting” about index funds investing have prevented the subprime loan crisis?

In numerous ways. You can’t have trillions of dollars of pretend money (that’s what irrational exuberance is) sloshing around the economy and not suffer devastating consequences.

Much of the irrational exuberance ended up being useed to psy inflated prices for real estate. A person whose stock portfolio is temporrily priced at two times its real value is far more open to paying an inflated price than someone who is aware of the real, lasting value of his stock holdings.

The Federal Reserve felt pressured to keep interest rates lower than it otherwise would have as a means of keeping stock prices from collapsing.

Once stock prices started falling, investors collectively lost trillions of dollars of consumer buying power. This caused hundreds of thousands of businesses to go under.

The failing businesses had to get rid of millions of employees. People without jobs do not spend as much as they did when they had jobs.

An economy built on irrational exuberance is an economy positioned for collapse. Pumping in irrational exuberance (But-and-Hold! No market timing!) makes the economic look stronger than it is for a time. But all you have done when you have told people not to bother with market timing is to erect house of cards. The economic realities remain what they were before you pumped up stock prices with your claims that market timing is not really needed. The economic realities always prevail in tje end. They have to. If they didn’t, the entire system would collapse, which would be the worst outcome of all.

Valuation-Informed Indedxing (market timing!) just permits the economic realities to assert themselves more quickly. When you permit people access to discussion of what the last 41 years of peer-reviewed reserch teaches us all about this important subject, many of them elect to invest rationally. The Buy-and-Holders ASSUME an efficient market but take away the tool (market timing) that is essential to creating it. With market timing, the market is able to actually achieve efficiency in the real world. Valuation-Informed Indexing makes the Buy-and-Hold vision os what the market is a reality and that of course makes the economy much stronger and more productive.

Businesses need to know how popular their products and services are. How could they possibly know when trillions of dollars of irrational exuberance are sloshing around, causing people to make purchases they would never make if they were permitted to know the real numbers? Shiller did not put an exxlamation mark after the words “Irrational Exuberance” in the title of his book. He was not saying that it is a good thing. Irrational Exuberance is a cancer. We should all be doing everything in our power to rein in irrational exuberance to the greatest extent possible. That means providing regular reminders to our friends and neighbors and coworkers of the importance of market timing.

Rob