A Rich Life

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

“The CAPE Value Would Have to Fall By 50 Percent Just to Get to Fair-Value Levels. To Suggest That a 50 Percent Price Drop Would Be a Bit of a Surprise Is to Suggest That Stocks Can Be Priced Higher Than Fair-Value Levels for Long Stretches of time but Never Go to Levels Below Fair Value. Really?”

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

My net worth is hitting another all-time high today. I’m happy, but I also know it could fall by some great number like 50%. What’s irrational about this? Irrational is doing the same thing every day for over 20 years and getting the same result every time but expecting a different result.

First of all, it could fall by a lot more than 50 percent. The CAPE value would have to fall by 50 percent just to get to fair-value levels. To suggest that a 50 percent price drop would be a bit of a surprise is to suggest that stocks can be priced higher than fair-value levels for long stretches of time but never go to levels below fair value. Really?

We have just lived through a 28-year time-period in which prices were far above fair-value levels. We shouldn’t consider it strange to see the irrational depression that inevitably follows irrational exuberance get just as much out of control as the irrational exuberance that brought it on. What do you think it would do to our economic system for us to see 28 years in which prices are far below faor-value levels, that is, far below where they would be after a 50 percent drop from today’s levels.

I think it makes more sense to be satisfied with the 6.5 percent real return we get from economic growth. The irrational exuberance garbage possesses zero appeal to me.

Research-based strategies haven;t just been working for 20 years. They have been working for 150 years. The entire point of doing research is to find out what works. Banning the discussion of what the peer-reviewed research shows works is irrational. Buy-and-Hold is an emotion-based approach. Not this boy, you know?

Rob

Comments

  1. It is simple, Rob. If YOU think stock is too expensive, just don’t buy it………..look at how well that worked out for you.

  2. Everyone should have the opportunity to go with a lower stock allocation at times when the long-term value proposition of stocks is poor (times when the CAPE value is high, like today). To fully possess that opportunity, they need to be able to discuss the last 43 years of peer-reviewed research at every discussion board and blog, without a single exception.

    My sincere take.

    Rob

  3. Everyone already makes that decision, Rob. They just don’t have to agree with you as to what YOU think. Is overpriced. They don’t have to be forced by you to go broke, just like what happened to you.

  4. Today’s CAPE value is 37, Anonymous. Do you think that that CAPE value came to apply as the result of millions of investors making informed choices as to their stock allocation?

    I see that CAPE value as being the consequence of the widespread promotion of Buy-and-Hold strategies.

    Rob

  5. I guess you need to take it up with Robert Shiller if you have concerns. He told you not to time the market with CAPE. The rest of us don’t need you telling us what to do. If you don’t want to buy stock, don’t buy them. Simple as that.