“High Valuations Certainly Signify a Price Drop at Some Time in the Future. But I Have Never Seen Any Evidence That the Time at Which This Price Drop Will Occur Can Be Known in Advance. I Don’t Think It Can Be.”

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 don’t believe that anyone should place any confidence in any guesses that anyone makes as to what will happen. I believe that we agree on that.”

Yet that is what you are doing when you are timing the market. Meanwhile, you won’t watch anything or read anything that has data which proves you are wrong. It is all part of your pattern of not listening to anyone else. That is why you are broke. That is why people have all cut you off and/or ignore you. It is why your wife divorced you.

Not at all. The key goal in Valuation-Informed Indexing is to Stay the Course in a meaningful way. Since the research shows that stocks carry more risk when valuations are high, the investor lowers his stock allocation to keep his risk profile stable over time.

You can’t say that, because valuations are high, stock prices are going to fall over any specified period of time. The precise opposite could happen. It is irrationality that pushes stock prices up to crazy levels. Who is to say that that same irrationality would not push prices even higher?

High valuations certainly signify a price drop at some time in the future. That much is so. But I have never seen any evidence that the time at which this price drop will occur can be known in advance. I don’t think it can be, It’s possible that future research will provide some clues as to when the price change will take place. Personally, I am skeptical as to whether that will happen,.

My sense is that many people want to know this, These would be information bits that would be satisfying to man investors. I am not sure that we are ever going to see helpful research in this regard. We know some things and we do not know some things. We know that valuations matter. We know that risk is variable, not stable. We do not today know when price changes will come and it may be that we will never know that.

I believe that we should take advantage of what we know and not worry so much about what we don’t know. We know a great deal more than what we knew in the days before publication of Shiller’s Nobel-prize-winning research. Good for us, We don’t know everything that we would like to know. Such is life, you know. Maybe someday we will know more. maybe not.

Rob