“The Odd Thing, of Course, Is That Shiller Never States in His Book in a Clear and Direct Way That All Stock Investors Should Be Engaging in Market Timing at All Times. Why Wouldn’t He Say That?”

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

I have a series of important questions to ask you Rob.  Hopefully, you won’t delete them like you usually do.  First question, does Robert Shiller and Wade Pfau recommend timing the market with CAPE?  Yes or no?

For the 16 months in which we worked together on our research, Wade certainly believed that CAPE can be used for long-term market timing. That was the entire point of the research, that is the question that we were looking at. He was a little unsure in the beginning. He was intrigued by the idea. But it was a big change from what he had been taught, So he proceeded carefully. When our research continued to show that timing ALWAYS works and that the difference it makes is very big, he could no longer resist acknowleding what the historical return data so clearly shows. That’s why he declared: “Yes, Virginia, Valuation-Informed Indexing works!”

All of this was before he was threatened, of course. Threats affect human behavior. They cause people to say things that they don’t really believe. That’s why we have laws against making threats to get people to say things they don’t believe. I would like to see those laws enforced in the investment advice field in the same way that they are enforced in every other field of human endeavor.

I am highly confident that Shiller believes that CAPE can be used to engage in long-term market timing. First of, his entire life’s work shows that that is the case. Shiller showed that valuations affect long-term returns. If that’s so, then stock investing risk is a variable and not a constant. If risk changes with changes in valuation levels, then investors who want to keep their risk profile constant over time (we all should want to do this) MUST engage in long-term timing. There is no other way to pull it off. Second, we have the paper that Shiller published in 1996 urging market timing because of the dangerous CAPE value that applied at the time. So, yes, I very much believe that Shiller believes in market timing.

The odd thing, of course, is that Shiller never states in his book in a clear and direct way that all stock investors should be engaging in market timing at all times. Why wouldn’t he say that? People buy books on investing for the how-to insights. They want to know what to DO. The most important how-to insight that follows from Shiller’s research is that long-term market timing is always 100 percent required. In ordinary circumstances, an editor would read that book and send back a note to the author that: “You MUST address the market timing question, that’s the most important advance achieved by your research and that is the advance that we need to publicize to market this book.”

Shiller feels intiminated in much the way that Phau and many, many others feel intimidated. The proble is that the discover that market timing is always required is the biggest advance in the history of personal finance. Yes, it would make all of our lives much better than we ever imagined they could be back in the dark ages of our belief that Buy-and-Hold might be an acceptable strategy. But to let people know how stock investing works in the real world would upset ten-thousands applecarts. Every text book ever written on the subject of stock investing would need to be rewritten. Every calculator would need to be rejiggered. The Buy-and-Holders would need to accept the blame for being the primary cause of the economic crisis. Buy-and-Hold was not around as an official strategy in 1929 but the Buy-and-Holders would have to acknowledge that the same “idea” that they push today (that market timing/price discipline is not always 100 percent required) was the primary cause of the Great Depression.

So, while permitting honest posting re the peer-reviewed research would make everyone’s life better, there are a lot of wealthy and powerful and well-connected people who would like to see discussions of this amazing advance in understanding suppressed. So lots of good people self-censor. Their consciences require them to tell people as much of the real story as they can get away with telling without losing their positions. But they say things in fuzzy ways that they hope will not get them in too much trouble. Every investor has a Get Rich Quick/Buy-and-Hold impulse residing within him; we all want something for nothing, as irrational as it is to think that that is possible. So, without clear and direct statements that market timing/price discipline is absolutely required, lots of us are just going to ignore the research. That’s how we end up with the sort of CAPE value that applies today.

Does that help, at least a tiny bit?

Rob