A Rich Life

The Old Ideas on Saving & Investing Don't Work -- Here's What Does

“If the World Were Open Today to Hearing About the Dangers of Get Rich Quick/Buy-and-Hold Strategies, the CAPE Value Would Not Be 31. That CAPE Value Suggests an Insane Level of Emotion. The More Emotional We Are About Stock Investing, the Less Open We Are to Taking the Peer-Reviewed Research Into Consideration.”

by

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

If you really believed in all of what you say, you would have filed criminal charges, you would have filed multiple civil lawsuits, you would have completed multiple books and you would be participating on all the major websites (such as Reddit).

If the world were open today to hearing about the dangers of Get Rich Quick/Buy-and-Hold strategies, the CAPE value would not be 31. That CAPE value suggests an insane level of emotion. The more emotional we are about stock investing, the less open we are to taking the peer-reviewed research into consideration.

I believe that there will come a day when both the CAPE value and confidence in Buy-and-Hold will collapse. I don’t believe that this level of emotionalism can be sustained. But it’s where we are.

There’s no lack of evidence that the Greaney retirement study lacks a value adjustment. But the study has remained uncorrected for the 21 years since I publicly pointed out the error.

The “idea” that market timing is not always 100 percent required is the “idea” that permits bull markets. We have intellectually gone beyond that idea. But we still cling to it emotionally. It still has its supporters and its supporters cling to it with a desperation that the advocates of research-based strategies do not possess.

Rob

Comments

  1. If the research says what you say it says, why haven’t we seen this big crash/buy and hold crisis by now? Given your post from 2002, are we not 20 years overdue?

  2. We’re certainly overdue. This is the longest stretch of time in the history of the U.S. stock market in which prices have remained at high levels.

    We are not 20 years overdue. Prices crashed to levels below fair-value levels in late 2008. By the end of 2009, they were back at high levels. They have remained at high levels since then. That’s 14 years. Since it often takes 10 years for prices to return to fair-value levels, I would say that we are four years overdue.

    Rob

  3. “ I would say that we are four years overdue”

    You previously stated that we were due by 2015 and that we should question VII if we did not see a crash by that time. What changed?

  4. The 2008 crash was unusual. Prices dropped below fair-value levels but they did not fall to level dramatically below fair-value levels. The usual rule is that years of irrational exuberance are followed by years of irrational depression. Prices usually drop to one-half of fair-value levels. And they usually remain low for a long time before a change in psychology permits prices to recover. Prices recovered from the 2008 crash in about a year.

    The bull market psychology was never entirely broken. There were a few months where it appeared to have been broken. But prices then recovered. We have never before had a situation precisely like that. We only have 150 hears of historical return data to work with. And a bull/bear cycle usually takes about 40 years to play out. So we only have three complete cycles on record. So it is still possible to see somewhat surprising return patterns play out.

    Rob

  5. You didn’t comment about your 2015 statement. It didn’t happen as you said it would. What happened?

  6. No one can say when a price shift will take place. Those sorts of predictions have a very poor track record. We can say that a price shift will take place once prices get too out of whack. But we cannot say when. The proper way to think about it is that the price at which stocks are selling affects the risk associated with holding them.

    We can identify when the risk of owning stocks is greater but we cannot identify when the price shift will take place. It depends on shifts in investor psychology and emotion shifts are highly unpredictable. It’s not hard to understand why that would be. Emotion is generally not subject to logic. Emotion can jump all over the place for all sorts of unexpected reasons.

    Rob

  8. Things certainly did not play out as I expected they would. I said at the time I made the prediction that that often happens, that, while risk is increased when valuations are high, it is not possible to say precisely when price shifts will take place.