I’ve posted Entry #503 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Once the CAPE Value Drops Below 16, How Long Will It Remain There?

Juicy Excerpt: So I ask myself: “If that can happen on the high side, can it not happen on the low side too?” I don’t deny my bias. I believe that valuations matter. I believe that high prices are irrational prices. The longer high prices remain in effect, the less I trust the market to behave rationally. So I wonder whether we will next see a long string of years with CAPE values lower than 16. Can you imagine where we would be after nearly 30 years of below-fair-value stock prices?

I’ve posted Entry #502 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Thing That We Call a Price Crash Is Really an Emotions Crash.

Juicy Excerpt: The Buy-and-Holders believe that the stock prices that applied prior to the onset of the coronavirus matter were justified. If that were so, then it would follow that the coronavirus was the entire cause of the crash. I believe that the stock prices that applied prior to the arrival of the coronavirus problem were nutso. The CAPE value at the time was 32, which is double the fair-price CAPE value of 16. So we were set for a price crash even before the coronavirus arrived on the scene. All that the coronavirus can do is to serve as the precipitating event setting a crash into motion and to cause the crash to be more devastating than it would have been had it only been the overpricing feeding it.

I’ve posted Entry #501 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Why I Describe the Buy-and-Hold Strategy As a Get Rich Quick Scheme.

Juicy Excerpt: That desire to push stock prices up beyond the levels where they would reside if only economic realities were considered is the Get Rich Quick urge that lives within all of us to get something for nothing. We don’t like to admit that we possess this emotional weakness. But Shiller’s research shows that we do. We are surely better off admitting it and dealing with it than ignoring it.

I’ve posted Entry #500 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Market Timers React Differently to Every Aspect of the Stock Investing Experience.

Juicy Excerpt: Market timers also react differently to price changes. Buy-and-Holders believe that it is economic developments that cause price changes. So they naturally see it as a positive when prices rise. If price increases signal economic growth, we all should applaud them. But market timers believe that price increases that take the CAPE value above its fair-market level of 16 signal nothing more than irrational exuberance on the part of investors. That’s a negative sign. It tells us that the market is becoming more emotional and less rational. Market timers do not applaud price increases that take stock prices above fair-value levels.

I’ve posted Entry #499 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Fair-Price CAPE Can Anchor Your Thinking About Where Stock Prices Are Headed.

Juicy Excerpt: But of course the reality is that recent prices tell us next to nothing about intrinsic value. What investors want to do is to buy stocks when they offer a strong long-term value proposition and not to buy them when they offer a poor long-term value proposition. Shiller’s CAPE value gives is the information we need. The fair-value CAPE is 16. When the CAPE is less than 16, stocks are a buy. As the CAPE value rises more and more above 16, the value proposition diminishes. The CAPE value today is 27. Stocks are a terrible value. The fact that the CAPE value was 32 not too long ago does not change that.

I’ve posted Entry #498 to my weekly Valuation-Informed Indexing column at the Value Walk site, It’s called The Stock Market Has So Far Underreacted to the Coronavirus Crisis.

Juicy Except:  It’s a paradoxical chore to try to describe shifts in investor emotion in a way that makes logical sense of them. Emotions do not follow the dictates of reason. Prices could do just about anything and we would have to accept the reality, whether we could make sense of it or nor. But even emotion-filled choices usually have some sort of logic behind them even though it is often very different than the mechanical form of logic that is our first choice to employ when describing a turn of events.

I’ve posted Entry #497 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Anti-Trump Sentiment Could Undermine a Recovery in Stock Prices.

Juicy Excerpt: Trump is a highly polarizing figure and even the question of when and how the economy should be reopened is beginning to break down to a large extent along party lines. Many investors who are not Trump supporters are skeptical of plans to open the economy too soon. Could their opposition to Trump’s plan to get the economy reopened quickly translate into a reluctance to participate in a stock price recovery?

I’ve posted Entry #496 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller Believes in Market Timing But Is Reluctant to Offer a Clear Endorsement.

Juicy Excerpt: Nowhere in his book does he offer advice on how investors who believe in his “revolutionary” (that word appears in the subtitle of the book) understanding of how the stock market works should make use of his insights to improve their returns. The obvious implication of every word written in the book is that investors should invest more heavily in stocks at times of low prices and should invest less heavily in stocks at times of high prices. But nowhere does Shiller identify the CAPE level at which investors should drop to a lower stock allocation. Investors buy books on investing to learn what to do with their money. So I find it hard to imagine that an editor of an investing book would not insist that an author include this sort of information somewhere within the pages of an investing book. But you won’t find passages addressing this question in Irrational Exuberance.

I have posted Entry #494 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Stubborn Irrationality of the Market for Beachfront Property.

Juicy Excerpt: Leave aside the question of whether the risks of climate change are over-hyped. That shouldn’t matter too much when it comes to the pricing of assets. If climate change is perceived as real (and it is certainly perceived to be more of a problem that it was perceived to be over 20 years ago), that perception should cause the prices of assets affected by climate change to fall. Yet that clearly has not happened in the case of beachfront property. Could it be that investors are not as rational as the Buy-and-Holders make them out to be?

I’ve posted Entry #493 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Narrative That We Use to Make Sense of Stock Prices is Changing.

Juicy Excerpt: I believe that the biggest factor determining the setting of a new narrative is the length of time for which new, lower price levels remain in place. Behavioral finance economists refer to a phenomenon they call “anchoring.” For so long as the CAPE level is 30, we trick ourselves into believing that 30 is the right number. So long as that belief holds, we don’t worry much about a drop to 24. Something tells us that 30 or something in that neighborhood is the right number and of course we will be seeing a move in that direction soon. But it becomes hard to continue to believe that after a CAPE of 24 has remained in place for several months. At some point, 24 becomes the anchor. At that point, we develop a suspicion of claims that 30 is the right number. That’s how price drops get locked in.

People who work in this field generally try to promote narratives that cause investors to have a belief that prices will be going up again soon. There are many circumstances in which these sorts of encouraging stories have the desired effect. But they can backfire. Attempts to build narratives about what is affecting stock prices that do not succeed can have the opposite effect. Such price-building narrative might be ignored at a later time when they are more appropriate and more needed. Efforts to send prices higher become part of a negative narrative when they do not work. That’s why price crashes often bring prices down not only to fair-value levels but to levels far below that.