“It Is Not Rational To Be Price Indifferent re Stocks in a World in Which Valuations Affect Long-Term Returns.”

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 low volatility stocks were available at a CAPE value of 17 then the demand for such wonderful valuable assets would drive the price up greatly.

You don’t seem to understand how supply and demand works.

The only way your dream scenario could happen is if no one noticed that those incredible investments were available.

You’re the one who doesn’t understand, Evidence. You are assuming rationality on the part of investors. That’s the mistake that the people who developed the Buy-and-Hold strategy made. The reason why Shiller was awarded a Nobel prize for his work is that his research shows that the market is NOT efficient, that investors are NOT rational. That’s why his book is titled “IRRATIONAL Exuberance.”

Permitting honest posting re the peer-reviewed research at every site would permit investors to become more rational than they are today. That would be a benefit to everyone.

It is not rational to be price indifferent re stocks in a world in which valuations affect long-term returns. The value proposition of stocks changes with changes in valuation levels. Investors who want to keep their risk profile constant over time MUST engage in valuation-based market timing (price discipline).

Price discipline is what makes markets work. Markets in which participants do not practice price discipline become dysfunctional. Hence, today’s CAPE value. Dysfunctional markets eventually collapse and the participants in those markets suffer horrible life setbacks. Those setbacks became OPTIONAL for stock investors in 1981, when Shiller published the amazing research that we all needed to click into place the up-to-then missing piece to the stock investing puzzle.

My sincere take.

Rob