A Rich Life

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

Valuation-Informed Indexing #345: Our Minds See Patterns Where They Don’t Exist and Fail to See Them Where They Do

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I’ve posted Entry #345 to my weekly Valuation-Informed Indexing column at the Value Walk site.  It’s called Our Minds See Patterns Where They Don’t Exist and Fail to See Them Where They Do.

Juicy Excerpt: Our minds really do look for patterns to make order out of chaos. I think that the Buy-and-Holders are on to something important with that observation. But I believe that we also fail to see patterns that really do exist. I look at the pattern of valuation levels rising and falling in long-term hills and valleys for 145 years running and I see a pattern that I find compelling. It does not seem possible to me that that pattern could sustain itself for that long a time if prices followed the random walk perceived by the Buy-and-Holders.

The random walk is a pattern!

Is it one of those imaginary patterns that the Buy-and-Holders so often warn us about? I believe it is.

“It Is So Important to the Tribe That We Continue to Believe That Our Stock Portfolios Are Worth Two Times What They Are Really Worth That the Vast Majority of Us Do Not Dare to Question the Conventional Wisdom, Even in Our Own Heads. These Ideas Will Not Spread Until As a Society We Take Steps to Make People Feel Safe Entertaining Them.”

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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:

“Thousands of our fellow community members have asked that you Goons dial it back and permit honest posting. I have had numerous university professors contact me and tell me that they are now including stuff that they learned from me in their courses. I have had investment advisors call me and talk to me for hours about how they can help their clients with Valuation-Informed Indexing insights.”

If this is the case, why don’t these supporters post here your website? Everything is anonymous, so they shouldn’t have any fear.

You are making an intelligent point, Anonymous. I have spent a lot of time thinking about this one. I think I have some clues at this point. I don’t think that I have it all figured out.

I mentioned my wife in an earlier comment. She says that she is confident that I have done hugely important work. So far so good. But she reacts negatively when I use the word “Goons.” I might say at dinner “let me tell you what I was talking over with the Goons today…” and she will interrupt and object to my use of the word “Goons.” I believe that this disconnect that she evidences is shared by most of the other humans. I have been able to watch this closely enough and long enough that I am coming to have a better sense of how it is that we humans come to experience the cognitive dissonance phenomenon.

The famous study on cognitive dissonance was done by asking people to say which of two lines is longer, a 12-inch line or an 18-inch line. When asked alone, just about everyone gets it right. We all have eyes and our eyes do their job and send a message to our brains informing us as to which line is longer. The next step to the experiment is to have five fake study participants in the same room answer the question with the wrong answer. “the 12-inch line is longer,” says one. “Yes, obviously,” says another. “I agree, it is clearly the 12-inch line that is longer.” Then the real study participant, the one who has eyes that would work perfectly well if he were alone in the room. gets confused “It appears to me that the 12-inch line is probably the longer one,” he says.

Do you see what is happening?

We have eyes. We have brains. We are capable of seeing reality and reporting it to others. But we also have a deep and compelling need to be at one with our fellow humans. It is built into us. Some would say that it was put there by evolution. The member of the tribe that walks his own way ends up getting eaten by animals or starving or freezing to death or whatever. The member of the tribe who learns the importance of getting along with his fellow community members lives long enough to pass along his genes to another generation. Getting along with our fellow community members is important stuff. We will sacrifice just about anything not to be removed from the tribe. We will say that a 12-inch line is longer than an 18-inch line if that is what it takes.

And we will believe it!

That’s an important part of the story. We humans value honesty. We tell lies all the time, of course. But we still value honesty. We have a hard time telling lies without the benefit of a good excuse. It’s hard to come up with a good reason why we should say that a 12-inch line is longer than an 18-inch line. So we come up with stories justifying what we said. It’s not so much that we want to justify what we said to others. It’s more than we want to justify what we said to ourselves. We cannot bear to think that we are liars. So we always rationalize our self-deceptions.

We all want to believe that our retirement accounts are worth two times what they are really worth today. We want to believe that Buy-and-Hold is a real thing, that it is not necessary to divide our portfolio values by two just because stocks are currently priced at two times their fair value. We come up with stories. And we believe those stories. The Buy-and-Holders are not really lying when they say that they believe that Buy-and-Hold works. They would pass a lie detector test in which they were asked if Buy-and-Hold works and in which they answered “yes.” They follow the strategy themselves. They don’t tell others to do things that they are not willing to do themselves.

My wife doesn’t have money in stocks. And she is married to me. You Goons have blocked my ability to earn an income for 15 years. That hurts my wife. She has every reason in the world to be angry at you Goons and she has no reason to say anything supportive of Buy-and-Hold. So why does she say that I am wrong to refer to you Goons as “Goons”?

I believe that what is going on is that she wants to belong to the community. This is built deep into her as it is built deep into all of us. If she says “oh, those awful Goons!”, she is not just expressing support for me, which she would otherwise be inclined to do. She is also expressing negative thoughts about the tribe as a whole. If you truly are Goons and yet you walk free, the tribe has messed up, it has failed to protect the rest of us from a gang of Goons. It’s scary for my wife to form that thought in her mind. To form that thought would require that she break from the tribe and evolution has formed her to view breaking from the tribe as a terrible mistake. So her mind creates what it perceives as a safe middle ground — she shows support for her husband by saying that he has done work of huge importance and yet she sticks with the tribe by expressing the view that he must have done something wrong to bring on the Goon attacks.

That’s my take on it, Anonymous. I believe that there are lots of people out there who want to explore these issues — about 10 percent of the population follows a Valuation-Informed Indexing strategy today and about another 10 percent has sufficient interest in the possibility to want to be able to ask questions about it. But virtually no one feels comfortable being separated from the tribe. So my supporters generally keep it zipped once it becomes clear to them that supporting the views I put forward is tribe-separation behavior.

It doesn’t matter that these people could post anonymously. It logically seems that it should matter. If you can post anonymously, no one can actually hurt you for saying what you believe, you are safe. You are safe but you do not feel safe. People do not feel safe forming ideas in their heads that are tribe-separation thoughts. People SELF-censor. People don’t even let themselves form the prohibited thoughts. There is a SOCIAL TABOO against belief in or even consideration of Valuation-Informed Indexing today. It is so important to the tribe that we continue to believe that our stock portfolios are worth two times what the peer-reviewed research of the past 36 years shows they are really worth that the vast majority of us do not dare to question the conventional wisdom, even in our own heads, even with the cloak of anonymity in place to protect us.

These ideas will not spread until as a society we take steps to make people feel safe entertaining them. Once we do that, they will spread quickly. The thing that is holding us back is the fear that we all feel deep down inside not to break with the tribe.

These are my sincere thoughts re these terribly important matters, in any event.

I naturally wish you the best of luck in all your future life endeavors, old friend.

Rob

“I Have Had Several College Professors Include Links to Material Posted at My Web Site as Part of the Required Reading for Their Courses Because They Felt That the Material Was So Important and Could Not Be Found Elsewhere. That Tells Me Something.”

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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:

“I earned the $500 million, Anonymous.”

Who says you earned this? I think I have earned $2 Billion for my work. Does that mean I will see it?

I have the laws of the United States on my side. That tells me something.

I have seen thousands of my fellow community members say that the debate that I launched was the most important debate that we ever saw on our boards. That tells me something.

I have my name on the most important piece of peer-reviewed research published in the past 30 years. That tells me something.

I had a fellow who was universally recognized as the smartest numbers guy in our community decide to devote eight years of his life to exploring the implications of my ideas knowing that he would not receive a penny of compensation in return. That tells me something.

I have had investing advisors call me on the phone and talk to me for hours because they want to learn more about Valuation-Informed Indexing and how it can help their clients. That tells me something.

I have had several college professors include links to material posted at my web site as part of the required reading for their courses because they felt that the material was so important and could not be found elsewhere. That tells me something.

I have had you Goons reduced to making use of death threats and demands for unjustified board bannings and tens of thousands of acts of defamation and threats to get academic researchers fired for the “crime” of doing honest work. That tells me something.

I have had many of my fellow bloggers come up to me at Financial Blogger Conference events and tell me that they find great merit in my ideas and that they hope that the day will come when the entire blogging community can talk them over in a civil and reasoned way without you Goons around. That tells me something.

I have seen Robert Shiller awarded a Nobel prize for his “revolutionary” (his word) research findings.

I saw the economic crisis that was predicted in a book published by Shiller in March 2000 come to pass and destroy millions of middle-class lives and even undermine the confidence of many on both the left and the right in the political system that permitted this to take place. That tells me something.

Everything that I have seen since the morning of May 13, 2002, tells me that we did the right thing as a society when we elected to make financial fraud a felony, a crime punishable by a prison sentence. Nothing that I have seen cuts the other way. So, yes, I have come to the conclusion that we got that one right and that we are going to see reasonable (and I hope charitable) enforcement of our laws in the days following the next price crash, when as a society we come to realize that the harm done by Get Rich Quick schemes that is so evident in the long run is often hidden from most of us in the short term.

I have earned $500 million and a lot more from my work of the past 15 years, Anonymous. It is very, very, very important work. I am humbled to have been handed the assignment that I have been handed. I will do everything in my power to carry out the assignment in a way that works best for every single person involved. And that’s that. I will solider on with love in my heart for you Goons but also with love in my heart for the millions of middle-class investors whose lives you are in the process of destroying with your nasty and ugly, and, yes, criminal abusiveness. The motto that I call to mind with every post I advance is to be as honest as possible without crossing the line and becoming uncharitable while also being as charitable as possible without crossing the ling and becoming dishonest. I hope that works for you.

If it doesn’t, it doesn’t. I don’t have it in my powers to make you happy about it. I need to accept that reality whether I like the idea or not.

I wish you all good things. If that helps, I can deliver that much.

Rob

“Do You Think That Wade Pfau Would Be Willing to Pay One Year’s Salary to be Able to Do Honest Work for the Remainder of His Life? I Sure Do. Everything That I Know About the Man Tells Me That He Would Jump on That Deal in a New York Minute. And Wade Is Obviously Not the Only One Who Feels That Way.”

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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:

Why would anyone want to “chips”? I don’t think anyone wants to hand you their money. How are we “in it together”?

Wade Pfau would very, very much like to do honest work in this field. I think it would be fair to say that that one is beyond question given what he told us re his feelings about Valuation-Informed Indexing in scores and scores of comments.

But Wade does not want to give up his entire career as his price of doing honest work. He spent years in school, he has a family support, he does not feel that it is a viable thing for him to have to drop out of this field and start over. So, when threatened by you Goons with threats that appear to have Bogle’s support, he flipped to the Goon side.

Now —

Do you think that Wade would be willing to pay one year’s salary to be able to do honest work for the remainder of his life? I sure do. Everything that I know about the man tells me that he would jump on that deal in a New York minute.

And Wade is obviously not the only one who feels that way. I sometimes get the feeling that just about everyone in the field feels that way. It’s not everyone. But it is lots and lots and lots of people. There are enough people working in this field who want to do honest work that raising $500 million to make it happen is not going to be much of a challenge once we get down to the business of raising the funds instead of arguing over whether we should permit honest posting in this field or not.

The money is just not an issue.

The trouble is that, if Wade hands over that money to someone who asks for it, he is making a statement that Bogle and his Wall Street Con Men pals are corrupt and should be sued and in some cases should go to prison. These are powerful and wealthy and well-connected people. Making that sort of statement is career death.

What to do, what to do?

We need to pull together and persuade Bogle to make a speech in which the words “I” and “Was” and “Wrong” appear somewhere in the mix of words. Bogle can of course include lots of other words of his choosing. But he needs to send a signal that the Campaign of Terror is over and starting here, starting now, things in this field are going to proceed at least largely according to the same sort of ethical principles that apply in every other field of human endeavor. If he cannot say that much, he absolutely needs to say that it is POSSIBLE that he is wrong. Even that much would get the job done.

Bogle won’t do it today. That’s unfortunate.

Will he do it in the days following the next price crash, when he is reading in the newspaper every day how the Buy-and-Hold Crisis is tearing our country apart?

I think Bogle is a great man. I don’t think that a great man will be able to hold back from saying those words at that time.

We will have to wait to see how it all plays out to know for certain. But that’s sure what I believe. I think we are all in a trap here. My job is to get us out of the trap. My job is to make the life of every single person involved better while doing that. I’m giving it my best shot, Anonymous. I can do no more and I can do no less. It’s not like I have any other viable options available to me.

I believe that we will get there. I wish it were not so hard. But in an ultimate sense it is what it is, you know? We all are living in a world that we did not create. We all have to make the best of the circumstances in which we are placed. I sure didn’t choose any of this!

Rob

“Those Who Leave Their Money in Stocks Following a 50 Percent Increase Starting From Today’s Price Levels Are Going to Give All That Money Back When Prices Return to Fair-Value Levels (or to Much Lower Levels) in the Following Years.”

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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:

In September 2015 Shiller said the fair value for the Dow was 11,000. Now, with the Dow over 21,000, he says it could go up another 50%. So as a devoted follower of his every word, where do you put your money, when his words are going every which way?

Obviously Shiller’s Nobel Prize doesn’t mean he can predict the market any better than anyone else. As you have found to your great dismay and financial ruin.

I don’t follow Shiller’s every word. I think he is a giant in this field. But I of course also think that Bogle is a giant in this field. And I don’t think that there is any fair-minded person who would say that re Bogle I am “a devoted follower of his every word.” I take from Bogle what I find valuable and I am grateful for what I have learned from him. And I do the same re Shiller.

Shiller’s Nobel prize does not permit him to engage in short-term market timing any better than anyone else, in my assessment. But it sure do does permit him to engage in long-term market timing far more effectively than Bogle or any of the other Buy-and-Holders. Shiller predicted the economic crisis that began in 2008 in a book published in March 2000. Bogle sure didn’t do that. Shiller was able to do that because his research has taught him important thing about how the stock market works that Bogle has unfortunately not yet integrated into his thinking.

I agree 100 percent with Shiller that the market could go up another 50 percent. All that you need to do to see that this is so is to look at what happened in 1997, 1998 and 1999. In 1996, market prices rose to insanely dangerous levels. I took my money out of stocks in the Summer of 1996 because of those insanely dangerous price levels. And Shiller predicted in Federal Reserve testimony delivered in October 1996 that those sticking with high stock allocations despite those price levels would live to regret it within 10 years. Prices rose over the next three years by a lot more than 50 percent. I don’t see what more could be needed to prove this particular point.

My gripe with Shiller is that he focuses on the wrong point when he makes this accurate claim. Yes, stock prices could go up another 50 percent from the insanely dangerous levels where they stand today. What of it? Those who leave their money in stocks following a 50 percent increase starting from today’s price levels are going to give all that money back when prices return to fair-value levels (or to much lower levels) in the following years. So what real benefit is there in this? When Shiller focuses on this aspect of the question, he is saying words that are going to mislead a lot of people into underestimating the risks of investing heavily in stocks at today’s prices. That’s extremely unfortunate, in my view.

There is nothing wrong with Shiller saying what he said. It is a true comment and it is an important truth that he pointing to. But it is not the entire story. I would make that comment and then I would add the comment that a 50 percent price jump that starts from today’s price levels will not supply any long-term benefit to those sticking with their high stock allocations. That is the point that is poorly understood today (the vast majority of investors already appreciate that prices could go up another 50 percent from today’s levels). Today’s stock investors need to know that they should not be rooting for a 50 percent price increase, that a 50 percent price increase will hurt them in serious ways. That’s the new understanding of how stock investing works that follows from an appreciation of the “revolutionary” (Shiller’s word) research findings of 1981.

As for your comment that Shiller’s words “are going every which way,” I think there is some merit to this complaint. The answer here is to knock off the funny business. There are lots of experts in this field who would be 100 percent happy to share with Buy-and-Holders what the last 36 years of peer-reviewed research tells us all about how stock investing works in the real world. Most people don’t like to be threatened with violence and with career destruction. Rein in your most ugly emotions and you will hear sounder and clearer and more enriching and more helpful investing advice from just about everyone in this field. This extreme (and in some cases even criminal!) behavior affects what you hear from Shiller and lots and lots and lots of others. You are hurting yourself and lots of others in very serious ways when you continue to engage in your insanely abusive behavior.

All of this is my sincere take re these terribly important matters, in any event.

I naturally wish you the best of luck in all your future life endeavors, my good friend.

Rob

“The Wall Street Con Men Are Not Our Enemies. They Want to Do Good Work. They Want to Help People. How Can They Get to a Place Where They Are Able to Do That Again?”

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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:

You have indicated that some Wall Street con men are going to pay you $500 million. There are hundreds of thousands that work for Wall Street banks. Which ones are going to pay you? How is that determined?

Anyone who wants to can chip in, you know? It’s not for me to say. They are smart people. Let them work it out among themselves.

You consistently seem to miss the point that we are all in this together, that we all want the same things. That reality is core to all of this. You can’t leave that part out and get to a reasonable place.

The Wall Street Con Men are not our enemies. They want to do good work. They want to help people. How can they get to a place where they are able to do that again?

They get to that place through the national debate that we need to have. That’s how these sorts of transitions are achieved. The Wall Street Con Men already talk about the national debate among themselves. They talk about it publicly because they don’t want to get their heads chopped off. But they obviously want to put their human energies to a good purpose. Why wouldn’t they?

The $500 million helps smooth the transition. It puts us all in a place where we can talk to each other like friends. I love Bogle. My work makes Bogle’s work shine in a way that it has never shined before. So in ordinary circumstances Bogle would love me. But Bogle is trapped in a corner. How do we get him out? It helps for him to contribute to the $500 million payment. That makes a statement. That permits him to get all the nasty stuff behind him and to direct his energies to all the groovy, research-based, life-affirming, non-fraudulent stuff.

I would imagine that Bogle would ask around to find out who wanted to be involved. Bogle knows people. And most of the people that Bogle knows know other people. This sort of thing is not a tiny bit hard to pull off.

There is one element that is hard. Bogle needs to work up the courage to say the words “I” and “Was” and “Wrong.” After that, everything is easy for everybody. It has over time become very, very, very hard for the man to say those words. He should have said them in 1981. It would have been easy then. Now it is very, very, very hard. I wish it were not so. But that is the reality we are facing today.

All of the rest will just flow naturally. Bogle needs to work up the courage to say the three magic words. That’s the entire ball of wax re this matter.

Rob

“My Wife Is 100 Percent Confident That I Have Achieved Huge Advances in This Field. She Needs to Tell Herself That I Had Something to Do With the Bad Stuff or She Would Lose Her Faith in Humanity. I Think That She Is Pretty Darn Representative of How Other People Think About These Matters. We Have Never Seen This Level of Corruption in Any Field of Human Endeavor in the United States.”

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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:

To you this is an open-and-shut case. To everyone else, it’s madness. Yes, literally everyone else, including Mrs. Bennett.

Does it ever occur to you that you might (gasp!) be wrong?

In the early days, I thought it was possible that I was wrong. On the morning of May 13, 2002, my confidence level was 90 percent. That’s a high confidence level. But it certainly left open the possibility that I was wrong.

My confidence level shot up to 99 percent on the evening of August 27, 2002, when Greaney advanced his first death threat and 200 of my fellow community members endorsed it.

My confidence level can never get to 100 percent. That’s not possible for a human. We are flawed creatures. We often are blind to our own flaws. I am saying that that is so of lots of very smart and very good people. I had better acknowledge that it is so of me as well.

I could be wrong, Anonymous. I am not saying different. I am insisting that I am sincere. I know that with 100 percent certainty. I believe what I am saying. If every single person in the universe said that I was wrong, it would still be dishonest for me to say something other than what I believed. I can never go there. I have zero problem with the idea of having a note added to the bottom of every post I write saying “this fellow acknowledges that it is possible that he is wrong in every single thing he has ever said about investing.” That would be a healthy step, in my assessment. I feel that that message is there implicitly even today. It;s certainly a true statement. But adding that statement is a far cry from me saying things that I don’t believe. Saying things that I don’t believe crosses the line into financial fraud. Not this boy. That one is so far out of the question that I cannot describe how far out of the question it is.

I believe that the Buy-and-Holders are sincere too. I recorded a podcast a number of years back where I examined the question of whether Scott Burns could pass a lie detector test on whether the Buy-and-Hold retirement studies are accurate. I said that I thought he could. But I added that I do not believe that he could pass a lie detector test if the question was “Are death threats appropriate in discussions of investing?” and he answered “yes.” He knows that your Goon behavior is wrong. Bogle is in that same camp. Bogle knows that your Goon behavior is wrong and he does nothing about it. I believe that Bogle believes that Buy-and-Hold is a good strategy but I do not believe that Bogle believes that Mel Lindauer’s abusive behavior is even a tiny bit appropriate.

My wife doesn’t say that my work is madness. She has told me that she is 100 percent confident that I have achieved big advances in this field. She is afraid of you Goons. She wants me to be able to write on every discussion board and blog on the internet. She has allowed you Goons to intimidate her. She does suggest at times that I had something to do with causing the intimidation tactics. I deny that 100 percent and challenge her to check out the Post Archives to find out for sure but she refuses to do that. I believe that she needs to tell herself that I had something to do with the bad stuff or she would lose her faith in humanity but that she doesn’t want to check the record because she suspects that it would back me up. But she acknowledges that I have made important contributions to the field. There is no question in her mind re that one.

I think that she is pretty darn representative of how other people think about these matters. We have never seen this level of corruption in any field of human endeavor in the United States. The realities here are pretty darn shocking. So people have a hard time letting it in. What distinguishes me is that I say that that reality tells us that we had better figure out what is going on. WHY have we seen a level of abusiveness and corruption never seen before? It’s not because investing is so darn trivial that no one bothers to enforce the law. It is because everyone understands that investing is so darn important that we cannot bear to face up to what we have done to ourselves by going along with this 36-year cover-up. The irony is that, the more lives we destroy, the harder it becomes to do anything to fix the problem.

If I am wrong, then the foundations on which we built our economic system and our political system are wrong. Our systems are rooted in the belief that there must be a marketplace of ideas, that any idea whatsoever can be challenged and that it is up to the individual to decide for himself or herself which idea to follow. You believe in Buy-and-Hold. That’s your business. But you have zero right to deny access to discussions of the last 36 years of peer-reviewed research to the thousands of our fellow community members who expressed a desire to be able to talk this stuff over in peace. You crossed an important line when you endorsed Greaney’s first death threat. I love my country and so I am bound to say that you are wrong when you attack the foundational principles on which my country was built.

I think that I am right on the substantive issues. But I know with absolute certainty that I am right re the process issues. I would give up my life for my country. I would tell my boys to give up their lives for their country if they were put in circumstances in which they were asked to do so. That feeling runs deep. I cannot see that one changing in 15 years or in 15 billion years. That feeling is the core of everything I am. That one can never change. At least not for me.

My best wishes to you.

Rob

“There Is Some Other Force That Always Causes Bull Markets to Go ‘Pop.’ This Other Force Is Common Sense.”

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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:

“there has never yet in U.S. history been a secular bear market that ended with a P/E10 of more than 8”

But markets don’t consult history books when deciding where to move. There’s never been an *infinite* number of scenarios – until they happen.

There are millions of price patterns out there (“Apple stock has never dropped 20% when there’s been a drought in Texas”). But hunting for them and guessing they’ll reoccur is just silly. Markets have no memory.

I like this comment a lot, Anonymous. I don’t agree with your conclusion. But it is my view that the point that you are making is an important one and a helpful one.

I 100 percent agree with you that markets don’t consult history books. This goes to the mistake that short-term timers make. They look for patterns in the history books and they proceed on the assumption that these patterns are going to repeat. My view (and it is my very strong sense that you agree with me re this) is that these people are fooling themselves. Buy-and-Holders have a great distaste for the search for historical patterns. I generally share this distaste.

I say “generally” because I obviously find some significance in the pattern that I referred to in the comment to which you were responding. I say that we always drop to a P/E10 value of 8 before seeing the end of a secular bear market. If that is so, we are all (including those of us not even in the market) going to see a lot of pain in days to come. But you are of course correct that markets don’t consult history books. So why do I even bother pointing out this pattern? Patterns don’t matter. Why be concerned about it?

The reason why I give a small number of patterns a significance that I do not give to the sorts of patterns cited all the time by short-term timers is that I believe that Shiller did more than just point out a particular pattern (that’s really all he did — he showed that there is a correlation between the P/E10 value that applies today and the stock price that applies 10 years down the road –that correlation creates a return pattern that plays out over time). It’s not the pattern that Shiller pointed out that is so all-important. That pattern is interesting. But the existence of the pattern suggests something far, far more important. The existence of the pattern suggests that the Buy-and-Holders were wrong in their core assumption re how markets work.

The Buy-and-Holders believe that it is economic developments that cause price changes. This is a core belief. If this is not so, everything that the Buy-and-Holders have ever said is called into question. Shiller ripped our understanding of how stock investing works apart. This is why I always note that he called his 1981 research findings “revolutionary.” And this is why he was awarded a Nobel prize. Shiller did not just point to one particular pattern that has always applied. He challenged the fundamental premise of the entire Buy-and-Hold project. If the market is efficient /rational, as the Buy-and-Holders believe, then prices should play out in the pattern of a random walk. Shiller showed that they do not. Shiller showed that the market is not efficient/rational.

If the market is not efficient/rational, then what is it?

Shiller’s answer is that it is emotional. It is investor emotions that set stock prices, not economic developments. That’s why the title of his book is “Irrational Exuberance.” Shiller says (he doesn’t say it directly because he does not not want to be attacked by emotional investors but this logically follows from lots and lots of things that he does state directly) that you cannot trust the numbers on your portfolio statement — they are the product of investor emotion, nothing more, and emotions can change dramatically overnight. To say that you have enough to retire because your portfolio statement sets forth a certain number should give you little confidence because the number reflects cotton-candy nothingness (emotions), nothing more.

That’s not 100 percent true. That’s not quite the entire story. There is another element to this story.

The other element is that the stock market always does reflect the economic realities in the long term. If it was only investor emotion that matters, stock prices would go up and up and up and up and never come down. We would all vote ourselves instant retirements and our scheme would work because the numbers on our portfolio statements would support our scheme. We the investors comprise the market and the market determines what the numbers are on our portfolio statements and the numbers on our portfolio statements determine when we can retire. So we decide when we can retire. We can retire tomorrow if we want to. All we need to do is to persuade all of our investor friends to engage in the same fantasies that we want to engage in. Since the fantasies work to their benefit as well, this is not hard to do. The result is what we call a “bull market.” Except it never works. There is some other force that always causes bull markets to go “pop.”

This other force is common sense. We all have it. We cannot escape it. We all possess a Get Rich Quick urge and that is why we have bull markets. And we all possess common sense and that is why all bull markets end badly. It is the tension between our Get Rich Quick urge and our common sense that determines the numbers on our portfolio statements, not the economic realities. But our common sense longs for the economic realities to apply and so there is indeed a connection between the economic realities and the numbers on our portfolio statements. It is just that that connection applies only in the long term. Prices are always moving in the direction of the economic realities but it takes 10 years or sometimes even a little more than that for them to get there. Overvaluation can remain in place for significant stretches of time. But the economic realities always asset themselves in the end and those who take the numbers that temporarily appear on their portfolio statements too seriously make a very big mistake.

I care about the pattern that I cited because it shows how stock investing really works. I don’t care about the specifics of it because I don’t trust historical patterns any more than you do. But I care deeply about getting the numbers right. And it is not possible to get the numbers right if you ignore this tension between the Get Rich Quick urge that we all possess and the common sense that we also all possess that decides where stock prices are going to end up in the long run.

I want to get the numbers right. I take note of the patterns that I need to take note of to get the numbers right. I don’t take it beyond that. I don’t make precise predictions because I don’t trust historical patterns to tell me what I need to know to get precise predictions correct. But I refuse to ignore historical patterns that reveal to me the basics of how stock investing works in the real world and that warn me never, ever, ever to accept those portfolio statement numbers at face value. I adjust the emotion-rooted numbers to bring them more in line with the economic-reality-rooted numbers that would apply if we investors had better control of the Get Rich Quick urge that for many years now has made stock investing a risky enterprise (but that no longer needs to do so now that we know what the last 36 years of peer-reviewed research in this field teaches us).

Rob

Valuation-Informed Indexing #344: If Shiller Is Right, Buy-and-Holders Should Be Feeling Intensely Emotional Today

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I’ve posted Entry #344 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called If Shiller Is Right, Buy-and-Holders Should Be Feeling Intensely Emotional Today.

Juicy Excerpt: Some would say that investors were more emotional in the wake of the 2008 crash than they were in early 2000, when the P/E10 value was much higher. I view that as a surface perception. If you interviewed both sets of investors, you would have heard more expressions of worry from the investors of early 2009. I know that to be so because I was sitting in on lots of investors’ conversations via internet discussion boards at the time. But I can report that the investors of the early 2000s were “crazier” in important senses, based on interactions that I had on internet forums that I visited in those days.

 

Valuation-Informed Indexing #343: An Emotion-Driven Walk Down Wall Street — A Thought Experiment

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I’ve posted Entry #343 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called An Emotion-Driven Walk Down Wall Street — A Thought Experiment.

Juicy Excerpt: Each new pay cut would cause the employees who had not yet joined the pay cut bandwagon to become more anxious re what their fate would be if they jumped on the latest trend too late. Just as excessive pay increases had at one time begot ever more excessive pay increases, now excessive pay cuts would beget ever more excessive pay cuts. If things got sufficiently out of hand, a situation might even develop in which employees voluntarily elected to pay themselves less than their bosses would have elected to pay them under the old system for setting the amount of pay increases; most employees would prefer to be paid less than to lose a job.