“Once Adjusted Numbers Appear on Portfolio Statements Below the Official Numbers, the Gap Between the Adjusted Numbers and the Official Numbers Will Diminish.”

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

You already agreed that the value is what my account balance says because I can spend it today.

You could spend the full stated value of your portfolio if you elected to cash it in. It doesn’t follow that that is the correct value. To identify the correct value, you need to adjust the stated value for the effect of irrational exuberance.

We learned something important in 1981. That’s why Shiller was awarded a Nobel prize. You cannot just identify the value of your portfolio in the same manner as you would have in 1980 — by looking at the value listed on your portfolio statement.

I would like to see adjusted numbers appear on portfolio statements as well as the stated numbers. That would be a hugely positive reform. Ask yourself — how do we get there? We don’t get there by not talking about the subject, by pretending that Shiller did not do anything of consequence. He did something of great consequence. He showed that shifts in investor emotion — a factor not considered in the calculation of the number that appears on the portfolio statement — affects the real, lasting value of the portfolio. I believe that there will be a time when the accurate number is printed on the portfolio statement below the inaccurate one. To get there, we need to begin talking about what it is so important that that be done. We need to open every site to honest posting re the new peer-reviewed research.

There was a time when we did not know that smoking causes lung cancer. Now there are. Do you think it would have been a good response to claims that smoking causes cancer to say “there are no warnings about cancer on cigarette packages, surely there would be warnings if that really were so.” There’s a step between knowing something and taking the appropriate action in response to that knowledge. We know today that valuations affect long-term returns. But we have not yet taken the appropriate step of doing everything in our power to persuade people always to practice valuation-based market timing in an effort to keep irrational exuberance from getting out of control. To get to the point where we take that step, we need to let the knowledge in, we need to talk about it everywhere we talk about stock investing.

Not talking about the new knowledge doesn’t make it go away to. Not talking about it –pretending that we live in the world that existed in 1980 — is fraud. We don’t live in the world of 1980. The last 44 years of peer-reviewed research exists. No, that research is not reflected in the numbers that appear on our portfolio statements. That’s unfortunate. That’s bad. That’s something that we all should want to change.

Once adjusted numbers appear on portfolio statements below the official numbers, the gap between the adjusted numbers and the official numbers will diminish. At some point, we may defeat the cancer of irrational exuberance altogether. We get there step by step. The first critical was having research published showing that valuations affect long-term returns. The second critical step is opening every site in the internet to honest posting re the peer-reviewed research. Shiller’s research was of huge importance. But we have not obtained the benefits of that research as of today because as a nation of people we have not get given ourselves permission to talk about the far-reaching how-to implications of that research.

The stated value of your portfolio is not its real value. Irrational Exuberance is included in the stated value but is not real. That’s the entire point of Shiller’s research. That’s what it means to say that valuations affect long-term returns.,

Rob