I’ve posted Entry #451 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Stronger the Suppression of Challenges to High Stock Prices, the Stronger the Panic Will Be When They Fall.

Juicy Excerpt: The bursting of the tech bubble and the collapse of the real estate market are economic developments that in ordinary circumstances would have brought market prices to their knees. It didn’t happen that way this time. It’s important to think through why that is. A Buy-and-Holder would cite the fact that prices did not fall hard and remain low for a long stretch of time as evidence that there is no need for historical norms to reassert themselves. A Valuation-Informed Indexer would offer a different interpretation.

I’ve posted Entry#450 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called High Stock Prices Have Grown More “Sticky” Because Investors Are More Emotional Than Ever Before.

Juicy Excerpt: Humans are the rational animal. Shiller does not question that. His insight is to note that humans are also the rationalizing animal. We think. But we are not data-processing machines. Our emotions dictate where we permit our logic to take us. We are capable of understanding that high stock prices cannot be sustained forever. But we are also capable of tuning out what we understand when the temporary rewards of high stock prices possess more emotional appeal that we are willing to pass up.

I’ve posted Entry #449 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Grantham Stills Believes That Valuations Matter, He Just Also Believes That High Stock Prices Have Grown “Sticky.”

Juicy Excerpt: Grantham objected to reports suggesting “that I believe high prices are here permanently and that I also believe regression to the mean has ended. This is, of course, inaccurate, as readers of my quarterly letters know. I have suggested that although mean reversion in margins and price earnings ratios is still probable, the speed of regression has slowed way down and become sticky. This slowdown is because nearly all of the factors causing it are themselves unlikely to change fast. These include Fed policy including moral hazard, lower interest rates, an aging population, slower growth, and productivity; and increased political and monopoly power for corporations. Because of this stickiness, I have suggested that regression of P/Es and profit share will take 20 years as opposed to the 7 years…that is more typical of the period 1900-1997 and that even then those measures will have only regressed back two-thirds of the way to the old normals… We should be braced for a long-drawn-out and painful flight path back toward the old ratios we know.”

Grantham is not saying that a CAPE value of 23 is the new normal. He is saying that the market has acted as if 23 is the new normal for over 20 years now and that it may continue to act as if 23 is the new normal for some time to come. But he is also saying that a CAPE value of 16 remains the true normal and that we will be getting there eventually. And, most importantly, he is saying that the long delay that we have experienced in getting back to truly normal prices has not been a boon to investors. It has hurt us. We would all be better off if insanely high prices had not become so sticky. He observes that: “What was quite surprising to me in this work, though, was how damaging even this reduced regression rate would be to the imputed returns of the S&P 500: 2.7% real per year for 20 years, a rate bound to break the hearts of many corporate and public pension fund officers.”

I’ve posted Entry #448 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Jeremy Grantham Casts Doubt on the Merit of the Valuation-Informed Indexing Strategy.

Juicy Excerpt: Grantham explains that: ““After the bursting of the tech bubble, the failure of the market in 2002 to go below trend even for a minute should have whispered that something was different. Although I noted the point at the time, I missed the full significance. Even in 2009, with the whole commercial world wobbling, the market went below trend for only six months. So, we have actually spent all of six months cumulatively below trend in the last 25 years! The behavior of the S&P 500 in 2002 might have been whispering in my ear, but surely this is now a shout? The market has been acting as if it is oscillating normally enough but around a much higher average P/E.”

He adds that: “If we have a bear market soon, even a severe one, will it recover to the new normal of 23x or the old normal of 15x? I believe the former. Let me remind you that that new 20-year era of higher prices was very severely stress-tested by the 50% decline from the 2000 Tech Bubble and the 50% decline in 2008-2009, perhaps the biggest foul-up of the financial system in modern times. Neither spectacular event was enough, apparently, to jolt the price trend back to its former lower level.”

I’ve posted Entry #447 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Five Strategies for Weathering Market Declines Ineffectively.

Juicy Excerpt: There is nothing difficult in knowing when to lower one’s stock allocation in response to increased risk. The historical return data showing us how stocks have performed starting from any of the various CAPE levels is available to all of us. Investors who want to keep their risk profile constant by adjusting their stock allocation in response to big price swings can do so. That strategy has always paid off in the long term. It is certainly so that investors cannot guess in advance when price drops are going to appear. But there is no need for investors to pull off this parlor trick. Investors who keep their risk profiles roughly constant over time do well in the long run. You don’t need to know the precise time when the strategy is going to pay off to understand why sooner or later it will. Stocks are a more risky investment class at times of high valuations. Investors should respect that well-documented reality.

I have posted Entry #446 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Robert Shiller’s Research Is the Best Response to the Growing Popularity of Socialism.

Juicy Excerpt: A pre-Shiller capitalism doesn’t get the job done. Millions of middle-class people are counting on the money in their retirement accounts to assure their financial futures. If half of that income is the product of a temporary irrational exuberance, those people are going to lose confidence in our economic system when they see years of saving effort laid to waste. A healthy capitalism does not permit the sort of price crashes that have become typical of our stock market in pre-Shiller years. Shiller is trying to help us build a better capitalism. As someone who is concerned about the growing popularity of socialism, I hope that we begin listening more carefully to what he is trying to tell us.

I’ve posted Entry #445 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called How Low Will Stock Prices Go Following the Next Price Crash?

Juicy Excerpt: I have been writing on the internet about Shiller’s research for 17 years now and I have seen no evidence that today’s investors possess more emotional balance than did investors from earlier times. I wasn’t on the scene in those earlier days. But I have seen a lot of emotion evidenced by Buy-and-Holders in response to my writings on Shiller’s research. If investors of earlier days were even more emotional, please do not ever put me in a time machine and send me back to experience those days. I don’t think that I could take it.

Shiller’s claim that it is irrational exuberance that sets stock prices in bull markets contains a troubling suggestion. We can never appreciate the instability of stock prices set by emotion at the time that we are living through them. If stock prices really are set by emotion, the emotional creatures doing the price setting are not going to be capable of seeing what they have done. It is in the nature of an emotional phenomena that the rational mind cannot grasp it. Reason and emotion proceed on different mental tracks, they speak different languages.

I’ve posted Entry #444 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Has Shiller Changed Anything About How Most of Us Invest Today?

Juicy Excerpt: If Shiller is right, everything that the Buy-and-Holders have ever said about stock investing is wrong. The Buy-and-Holders are smart people. But the reality is that any analysis that is done starting from an incorrect premise is going to lead to an incorrect conclusion. Shiller’s challenge to Buy-and-Hold is fundamental in nature; he refers to his ideas about how stock investing works as “revolutionary” in the subtitle to his book. Shiller did not change some things or many things, he changed everything. As a result, it is hard for people who have their financial futures riding on the validity of the Buy-and-Hold Model to give his ideas serious consideration. If they come to be persuaded that Shiller’s research is on the mark, their hopes for their own future fall apart.

I’ve posted Entry #443  to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Return Predictions Rooted in Factors Other Than Valuations Don’t Work.

Juicy Excerpt: I agree with Shiller that it is generally not possible to know why stock prices rise or fall. Where I part company with him is in his apparent belief that it is necessary to offer an explanation. My view is that there is only one factor that we can understand with some confidence and that all of our efforts to predict stock prices should be tied closely to that factor. When prices are high, they must drop hard (because it is the core job of any market to get prices right). And, when prices are low,, they must rise dramatically. That much is always so. The particular considerations that affect investor psychology in a given case don’t really make that much difference.

I’ve posted Entry #442 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller’s Research Findings Are the Cancer Cure of the Investment Advice Field.

Juicy Excerpt: What is the bad side of stock investing? It’s the possibility of losing most of your life savings in a short amount of time. Stocks are a super asset class most of the time. But there are those rare occasions when they deliver a wipe-out that remains in effect for a considerable stretch of time. Wipe-out losses are not forgotten by the investors who experience them. Wipe-out losses are the one black mark on an otherwise golden investment class. Wipe-out losses are the cancer of the investment advice realm. Shiller developed the cure.