I’ve posted Entry #651 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Why Stock Investing Is So Emotional.
Juicy Excerpt: The case for believing that the market is efficient (and that thus market timing is not required) is that investors all want to achieve good long-term results. It is their retirement money that is at stake. For so long as investors make decisions in accord with their self-interest, stock prices should be set properly and timing should not be required. All of that really does follow logically.
What Robert Shiller showed is that what follows logically simply is not so. There is a good reason why the title of his book is Irrational Exuberance. Investors do NOT act in their self interest, according to Shiller’s research findings. They push stock prices higher than the price that is justified by the economic realities. They hurt themselves by doing so. They cause themselves to suffer failed retirements. They cause economic distortions and in time economic collapses. The worst of the economic collapses exacerbate political frictions. Irrational exuberance is no joke.
No book
No job
No windfall
No retirement funds
No wife
No house
20 years of hocomania and you don’t have anything to show for it.
Life’s a bitch. And then you die. Am I right?
I’m just joking around, Anonymous.
I naturally wish you all the best that this life has to offer a person regardless of which investment strategy you elect to follow.
Rob
No, life is great. Just work a job, put money away and stay in the market. You will then have a nice house, a fully funded retirement and a happy wife.
And no Great Depressions or Great Recessions! All of that stuff is just made up by people who for some strange reason want to make Get Rich Quick/Buy-and-Hold stock investing strategies look bad.
Rob
Yes, those predictions of yours really worked out, right?
30 years of work with consistent saving and investing vs no work, no Davi gs and expecting a $500 million windfall. Which one is a get rich quick scheme?
Yes, those predictions of yours really worked out, right?
In the eyes of fair-minded people, they worked out. Each time I made a prediction, I included a caveat that predictions about stock prices only work in the long term and not in the short term. So the fact that they didn’t work in the short term is hardly surprising. We haven’t seen the long-term results yet. So we cannot say for certain that they will work in the long term. But, since the predictions are based on how stocks have performed over their entire history, it would be an extreme long shot for them not to work out.
In contrast, the pure Get Rich Quick/Buy-and-Hold “strategy” have never once worked out. The Bennett/Pfau research shows that beyond any reasonable doubt whatsoever. As Wade concludeed after 16 months of research. “Yes, Virginia, Valuation-Informed Indexing works!” If you Goons didn’t see how compelling our research was, you of course would not have engaged in criminal behavior (extortion is a felony) to silence Wade. So even you Goons “get it” in an important sense. You very, very much do not want to get it. But there’s a sense in which you do.
You simply cannot turn your common sense entirely off. You have succeeded in silencing others. But your own common sense just won’t shut up!
Rob
30 years of work with consistent saving and investing vs no work, no Davi gs and expecting a $500 million windfall. Which one is a get rich quick scheme?
Buying the same amount of stocks regardless of the price at which they are being offered for sale is a Get Rich Quick approach to stock invesitng. It’s a price indifferent approach. Price discipline is the magic that makes markets work. Encouraging people to give in to the Get Rich Quick impulse that resides within all of us and to fail to engage in market timing always produces an ocean of human misery. There is no other way that such efforts could turn out.
Thank the heavens that we don’t buy stocks in the way that millions of us have been persuaded to go about buying stocks. If the people who sold us cars tried to advise us to ignore price, we would laugh at them. Good for us!
Rob
“ In the eyes of fair-minded people, they worked out. Each time I made a prediction, I included a caveat that predictions about stock prices only work in the long term and not in the short term. ”
It a single one worked out. Long term is 10 years or more. We are beyond that.
Buy and hold achieves the market return every single time it is tried.
It a single one worked out. Long term is 10 years or more. We are beyond that.
Prices have never before remained this high for this long. If that bothers you, Valuation-Informed Indexing is not for you.
But it is not within your rights to decide for others. You can decide for you. But you need to respect the rigtht of thosre who want to hear about alternaitves to Buy-and-Hold to hear about those alternatives.
My best wishes.
Rob
Buy and hold achieves the market return every single time it is tried.
It does that. And that is a very good thing since the average long-term return on stocks is 6.5 real.
The problem is that it destabilizes both the stock market and the general economy. If we permitted honest posting re the peer-reviewed research, we would minimize irrational exuberance. Each time prices got dangerously high, investors who were aware of what the research shows about how high prices lower going-forward returns would lower their stock allocation a bit and that would bring prices back to reasonable levels. So we would not have out-of-control bull markets. Which means that we would not have out-of-control bear markets or the economic crises that follow from them.
The Bennett/Pfau research shows that, if we permitted honest posting re the peer-reviewed research, we could all retire many years sooner while taking on much less risk during the years we are invested in stocks. I can live with that.
Rob
“ The problem is that it destabilizes both the stock market and the general economy”
Since most stock buying is based on timing, you would be incorrect. Look at the continual trading volume and turn over rate.
Also, you try to compare buying stocks to that of buying commodities, such as cars and bananas. I am not away of any car or banana that generates an average real return rate of 6.5 to 7%. Further, commodities tend to be consumed and/or depreciate.
People buy things to obtain the benefits they provide. Cars provide the ability to get from Point A to point B. Bananas provide taste and nutrition. Stocks provide return. When stocks are overpriced, the return they provide is diminshed. So rational investors should buy less of them. The sales pull the price down until the stocks are priced properly and are worth that price. When investors become price indifferent, there is no way for the market to correct the price. Eventually it crashes the price because there is no other way for the market to perform its core job of getting the price right. It would be better if we permitted honest posing re the last 42 years of peer-reviewed research. Investors who make informed choices make better choices.
Rob
In 5 years, how much is that banana worth? How much income did the banana create?
In 5 years, how much is that car worth? How much income did the car create?
In 5 years, how much is that stock worth? How much income did the stock create?
Tell us again how buying stock is just like buying a car or banana.
The manner in which the rewards provided by the various purchases are delivered differs. But the buying process should be the same. In each case the person making the purchase should assess all of the pros and cons of making the purchase and elect the option that makes the most sense. Since the valuation level that applies at the time a purchase of stocks is made affects the value obtained from making the purchase, a stock investor should always, always, always take valuations into consideration.
Market timing/price discipline is 100 percent required for all investors. It’s not even possible for the rational human mind to imagine how there could ever be an exception. That’s why, when you check the historical record, you discover that there has never been one. As Wade Pfau put it after researching the question for 16 months, “Yes, Virginia, Valuation-Informed Indexing works”
My sincere take.
And my best wishes to you.
Rob