I’ve posted Entry #513 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Do Compounding Returns on Pretend Stock Gains Produce Real Value?

Juicy Excerpt: Another issue is that investors who are open to the idea of moving a portion of their assets into non-stock investments can often obtain better-than-normal returns on those investments by looking for alternatives to stock when prices go out of control. Treasury Inflation-Protected Securities (TIPS) were paying a return of 4 percent real in January 2000. Stocks purchased at that time have offered a return of only 3.7 percent real during those years. That 4 percent return was an exceptional deal, to be sure. But I don’t think that it was a coincidence that an amazing return was being offered on a non-stock investment class at the time in U.S. history when irrational exuberance was at its height. It took that sort of return to attract investors to a non-stock asset class at that time. Investors who were unwilling to participate in the irrational exuberance were properly rewarded by the market for their contrary convictions.

I’ve posted Entry #512 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Market Timing Can Work Even When It Produces Lower Returns.

Juicy Excerpt: Returns are not all that matter. If higher returns are obtained at the cost of taking on excessive amounts of risk, that’s a bad result. A strategy that produces those sorts of results is a bad strategy, in my assessment.

I’ve posted Entry #511 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Biggest Mistake That People Make Regarding the CAPE Metric.

Juicy Excerpt: The title of Shiller’s book on stock investing is “Irrational Exuberance.” That title suggests something shocking. It suggests that a portion of the money in our stock portfolios is not backed by economic realities, that a portion of that money represents nothing more than a passing emotional mood. What CAPE does is to reveal what portion of an investor’s portfolio is real and what portion is not. That permits him or her to plan his or her financial future more effectively than those investors who believe in the Buy-and-Hold idea that it is economic developments that cause stock price changes.

I’ve posted Entry #510 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Why Does It Take So Long for Stock Prices to Correct?

Juicy Excerpt: I believe that the Valuation-Informed Indexing Model offers a better description of what is going on, though certainly a less logical one. Stock price changes are determined not by economic developments but by shifts in investor emotion. The investor emotion that has been keeping stock prices up for 24 years now will eventually fade and prices will come down to earth. But that will not happen when it should happen, which was back in 1996 when Shiller wrote about the possibility in his paper. It will happen when investors give up their fight to block it from happening, which obviously is going to turn out to be a lot later than Shiller and I imagined possible.

I’ve posted Entry #509 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Considering Valuations Does Not Make a Stock Investor More Fearful.

Juicy Excerpt: I would not be afraid to invest in stocks after a price crash. I have just as much confidence that stocks will perform well starting from a low CAPE level as I have that they will perform poorly starting from a high CAPE level. And I would not be concerned that the price crash was due to some economic issue that might not yet be resolved. It is shifts in investor emotion that cause price changes, not economic developments. I wouldn’t feel able to say when prices would start moving upward any more than I today feel able to say when prices will begin moving downward. But when the CAPE level was low I would feel confident that the long-term direction of stock prices would be upward.

I’ve posted Entry #   to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Investor Psychology and Economic Realities Are Very Different Things.

Juicy Excerpt: Say that an investor is spooked by a price drop and is trying to determine whether to stick with his stock allocation or not. The one who believes that stock prices are determined by economic realities worries that the economic factors that have pulled stock prices down are likely to remain in place and continue to pull prices down some more. The one who believes that stock prices are determined by shifts in investor psychology is encouraged by the fact that the price drop has diminished the effect that irrational exuberance has been having on stock prices. The lower stock prices go, the better the long-term value proposition offered by stocks. That investor sees falling stock prices as a signal to increase her stock allocation.

 

I’ve posted Entry #507  to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Buy-and-Hold Is Both Intuitive and Counter-Intuitive At the Same Time.

Juicy Excerpt: That is an even more counter-intuitive idea than the idea that all forms of market timing work. Once people hear the concession that short-term timing doesn’t work, their minds push “eject” re the entire market timing concept. To engage in market timing, one would need to see into the future. If one could not see into the future well enough to predict where stock prices will be in six months, it seems implausible that one could see into the future well enough to predict where stock prices will be in 10 years. That paradox is probably the biggest hurdle that keeps people from grasping the Valuation-Informed Indexing concept.

I have posted Entry #506 to my weekly Valuation-Informed Indexing column at the Value Walk site. It is called Buy-and-Hold Is a Product of the Enlightenment.

Juicy Excerpt: Those two premises seem highly dubious to me. I know with certainty that investors do not have easy access to the information they need. I know this because my examinations of the implications of Shiller’s research are banned at numerous investing sites even though many investors have praised them effusively when they have been able to gain access to them. Buy-and-Holders do not want people to hear challenges to their strategy. And Buy-and-Hold is the dominant strategy today. So Buy-and-Holders have been able to silence challenges to the strategy just about everywhere and everytime that they appear. Most investors have heard the case for Buy-and-Hold but not the case against it. They do not have access to the information they need to make sound choices.

Are investors rational? Robert Shiller obviously does not think so. He titled his book “Irrational Exuberance.” It follows that he does not believe that the Modern Portfolio Theory is valid (although I have never heard him make this precise claim).

I’ve posted Entry #505 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Great Intelligence Does Not Protect an Investor from Emotion Traps.

Juicy Excerpt: David dismissed the idea that we could ever again see a CAPE value that low. In fact, he views the idea that we will ever again see a CAPE value below 21 as at least somewhat outlandish. He said that he did not expect that I would see a CAPE value below 21 in the remaining years of my lifetime. I find that a shocking assessment. The median CAPE value is 16. That means that in half of the years for which we have records of stock prices the CAPE has been below 16. On what basis could someone conclude that we will never again go below 21?

 

I’ve posted Entry #504 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Market Does Not Process New Information Quickly.

Juicy Excerpt:  Emotional investors do not act in their self-interest and emotional investors do not act pursuant to the dictates of logic. What if an economic development takes place that for some reason investors do not want to process immediately? There could be a significant delay between the time when the economic development takes place and the time when it is reflected in the price of stocks.