I’ve posted Entry #482 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Scary Reality Is That No One Knows for Sure How Stock Investing Works.

Juicy Excerpt: Can we be absolutely sure that market timing is a good idea? We cannot be absolutely sure. It can take 40 years for a bull/bear cycle to resolve. And we only have good records of stock prices going back 150 years. That means that we do not yet have even four full bull/bear cycle to examine. That’s enough to gain a good measure of confidence as to how stock investing works. But it is not enough to gain absolute confidence.

I’ve posted Entry #481 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Our Ongoing Study of How Stock Investing Works Is Not Taking Place in a Controlled Environment.

Juicy Excerpt: That ain’t science! Science is a quest for truth. True scientists don’t ignore evidence that they have made a mistake, they welcome challenges to their tentative conclusions that might help them to discover more productive paths of inquiry. Had the Buy-and-Holders took Shiller’s “revolutionary” (his word) findings to heart back in 1981, when he published them, Buy-and-Hold would be a very different and much more effective strategy today.

I’ve posted Entry #480 to my weekly Valuation-Informed Indexing column at the Value Week site. It’s called Valuation-Informed Equity Investing Strategies Generate Intense Reactions Both From Supporters and Critics.

Juicy Excerpt: It’s hard to buck popular opinion for as long as I have (over 17 years). I have been called every name in the book. I have been banned at every large investing site on the internet. And I have lost many friendships. It hurts to be a social pariah. And when my views are rejected again and again it causes me to question whether I have gotten something wrong.

I’ve posted Entry #479 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Investors Hurt Themselves in the Long Run By Bringing on Excessive Price Gains in the Short Run.

Juicy Excerpt: Can I afford two weeks of vacation this year or only one? Should I buy a new car or get by a bit longer with the one I already own? Should I encourage my child to attend a state university or tell her to feel free to attend a more expensive out-of-state one? Investors ask themselves questions of this sort on an almost weekly basis. To analyze these questions properly, they of course need to know how much they have in savings. It is of course impossible to know for so long as we live in a world in which stocks are often priced at two times fair value or more, as they have been for much of the past 23 years.

I’ve posted Entry #478 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Conditions Were Perfect for Cognitive Dissonance When Shiller Published His Revolutionary Research Findings.

Juicy Excerpt: I am generally skeptical of conspiracy theories. I think that a better explanation of the strange reality is that our confusion over how stock investing works is the result of one of the most widespread cases of cognitive dissonance ever experienced. Shiller published his research and it attracted a good bit of attention. But most of us continued thinking about stock investing in the same way in which we did before he came along all the same. Shiller’s message did not implant itself into our brains because our filters found it too radical for serious consideration.

Cognitive dissonance has been described as “the discomfort felt by a person who holds conflicting ideas, beliefs or values at the same time.” It’s not possible for the same person to believe in both the research of Eugene Fama (in which the Buy-and-Hold strategy is rooted) and of Robert Shiller. A stock portfolio cannot be worth both $200,000 and $100,000 at the same time. And it is of course not possible to form opinions about any investment strategy question without first determining the value of one’s stock holdings. Those who believe in Buy-and-Hold walk one path and those who believe in Valuation-Informed Indexing walk another.

I have posted Entry #477 to my weekly Valuation-Informed Indexing column at the Value Walk site. It is called Buy-and-Hold Has Performed Well in the Post-Shiller Era.

Juicy Excerpt: The real question is not what returns have been provided over what time-period. The real question is whether stock price changes are determined by economic developments, as the Buy-and-Holders believe, or by shifts in investor emotion, as Shiller has proposed. If it is economic developments that determine stock price changes, then Buy-and-Hold is the ideal strategy. If shifts in investor emotion determine stock price changes, then Buy-and-Hold is dangerous.

We cannot say when the dangers of Buy-and-Hold will reveal themselves. But if Shiller is right in what he says about what causes stock price changes, we can say for certain that sooner or later they will. Because, if Shiller is right, none of the numbers that I cited at the beginning of this article are legitimate. If Shiller is right, all of those numbers need to be adjusted for the effect of overvaluation (investor emotion). If the numbers were adjusted, investors would form very different conclusions about the merit of the Buy-and-Hold strategy.

 

I’ve posted Entry #476 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Buy-and-Holders Accept Credit for Stock Gains Caused By Irrational Exuberance But Blame a Bad Economy for the Losses That Follow.

Juicy Excerpt: There is a saying that, for something to be science, it must be falsifiable. Tautologies are not science. But and-Hold is a tautology. When stock prices zoom, it’s because of the great strategy. When prices collapse, it’s something else that is at fault. The price indifference that caused the zooming is not connected with the collapsing that has followed it every single time in which it has appeared. Buy-and-Hold is not falsifiable. According to the strategy’s advocates, it can never do harm. When investors are horrified by the numbers on their portfolio statement, it is not the strategy that is to blame.

I’ve posted Entry #475 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called There Are Things Other Than High CAPE Values That Cause Recessions But They Are the Biggest Factor.

Juicy Excerpt: So economists and business executives and journalists and policymakers trying to figure out where the economy is headed should be focusing less on inflation and interest rates and consumer sentiment and more on CAPE levels. When the CAPE level gets super high, a recession is on the horizon. When the CAPE level gets super low, an economic boom should be anticipated. Is all of that not so? I ask the question because this line of thinking makes perfect sense to me but I have never seen an article written by someone other than me cite it.

I’ve posted Entry #474 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller Showed That Market Timing Is Price Discipline — That Changes Everything.

Juicy Excerpt: The conventional line on Shiller is that he showed that valuations affect long-term returns. That’s just a non-provocative way of saying that market timing is price discipline. If valuations affect long-term returns, the risk of buying stocks is different at different valuation levels. If stock investing risk changes with changes in valuation levels, investors who want to keep their risk profile constant over time must adjust their stock allocation when valuations change. That’s market timing. If Shiller is right, market timing must work and market timing must benefit the investors who make use of it.

I’ve posted Entry #473 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Widespread Rejection of Market Timing Rules Out Consideration of Even the Modest Use of Price Discipline.

Juicy Excerpt: The trouble is that dogmatic Buy-and-Holders are able to sense where things will go once discussion of possibilities other than the good old 4.0 percent number are permitted. The 4.0 percent number has been around for a long time. And it has been promoted as a number that is the product of science. Scientific investigations are supposed to be hard and objective. If the number can change, it really wasn’t the product of science. And, if the number is not the product of science, then it can be almost anything. If the number is not obviously 4.0 percent, it could possibly even be something crazy like 1.6 percent. Buy-and-Holders cannot bear the thought that large numbers of investors will begin to think along these lines, so they do what they can to cut off debate before it produces any good fruit.