I’ve posted Entry #441 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Did the 2008 Crash Cause People to Become More Confident in Buy-and-Hold or Less So?

Juicy Excerpt: In the early days of the next crash, there will be competing waves of emotion pushing investors in opposite directions. One inner voice will be saying that this crash will turn out like the last one and that the thing to do is not to panic and sell.. Another will be saying that the good result obtained in 2008 will be jeopardized if this crash does not turn out like the last one, if this crash turns out to be the one that sends prices lower and that keeps prices at those low levels for a far longer stretch of time.

I’ve posted Entry #440 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called “In an Investing World Dominated by Hype, CAPE Is a Rare Truth-Teller.”

Juicy Excerpt: The full reality, however, is that valuations are back at the levels that brought on the 2008 crash. There are trillions of dollars of Pretend Money generating lots of artificial economic growth today. If valuations fall sharply, as they always do when they rise as high as they are today, earnings will crash and the warning being flashed by today’s CAPE number will be seen to have been a legitimate one, not an artificial one caused by events that transpired nearly 10 years ago.

The conventional view is that it is the economy that affects stock prices. But, if Shiller is right that stock prices are heavily influenced by investor emotions, it is just as much so or more so that stock prices affect the economy. If that is so, we cannot evaluate the merit of the CAPE metric by considering only the economic factors focused on by CAPE’s critics. We have to take into consideration how today’s irrational exuberance will be hurting us in days to come.

 

I’ve posted Entry #439 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Buy-and-Holders View Shiller’s Ideas About Stock Investing as Akin to Astrology.

Juicy Excerpt: Say that evidence existed that astrology works. Say that scientists came forward saying that we all should check out our astrological reading for the day and permit it to influence the decisions we make during the course of that day. I would be extremely uncomfortable doing that. If my reading said “do not take on financial commitments today,” I would feel foolish if I let that persuade me not to take out a mortgage or to buy a season ticket to attend Phillies games. I would feel like I was abandoning the use of human reason to go down that road.

I think that that’s how Buy-and-Holders feel about the idea of believing that long-term stock prices are predictable, as Shiller has shown. How could it be? If people knew in advance what stock prices were going to be 10 years down the road, they would take advantage of that information and their efforts to take advantage would change prices enough so that the predictions would no longer work. Overvaluation is an impossibility to the logical, reasoning mind. Shiller’s research findings are “unprofessional and flaky.”

I’ve posted Entry$438 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Internet Has Changed Our Understanding of How Stock Investing Works — In Both Good and Bad Ways.

Juicy Excerpt: I’ve seen Buy-and-Holders react defensively when I challenged their beliefs. That told me something. It told me that they are not entirely confident in their strategy. They want to believe. They don’t want to explore new possibilities. But they are not able to just accept that there are people out there with different viewpoints. It bothers them that there are people who see flaws in the Buy-and-Hold strategy. That’s not something that I could pick up from reading a book. It’s something that you can only detect by seeing how people react in real time to the expression of different ideas. The internet is the only communications medium that I know of that permits us to track such reactions with ease.

I’ve posted Entry #437 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Stock Market Requires Valuation-Informed Investors to Function Properly.

Juicy Excerpt: By following different sweater-buying practices, that sweater buyer is helping the sweater market to function properly. The companies that make sweaters and the stores that offer them for sale can afford to make more sweaters available at times of high demand if they know that, should they miscalculate in their assessments of the strength of the market, they will be able to sell those left-over sweaters to the customers who put getting a good price above all else, the contrarians. Contrarians grease the wheels of commerce. They are essential to efforts to make those wheels turn around smoothly.

So it is in the stock market. The conventional view is that stock price increases are always good and stock price drops are always bad. That is of course not so. The best stock prices are those that place stock prices at fair-value levels. Stock price increases that push the CAPE value above 16 are bad and stock price drops that push the CAPE value down closer to 16 are good. So stock price contrarians play an important role in keeping the market functioning well. When there are too few contrarians, prices spin out of control. A stock market without contrarians is a fast-moving car without brakes — plenty exciting but also plenty dangerous.

I’ve posted Entry #436 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Buy-and-Hold Contributed to the Fleecing of the Millennials.

Juicy Excerpt: The annualized stock return from January 1982 through January 2000, when Baby Boomers were in high wealth-accumulation years,was 14.7 percent real. The compounding returns that they earned on their stock portfolios during those years provided them a big edge in their efforts to accumulate enough assets in a limited amount of time to finance a nice middle-class retirement.

The millennials have not fared nearly as well. The annualized return from January 2000 through today has been 3.3 percent real. That’s less than one-fourth of the return earned by the Baby Boomers! That’s a lot less compounding!

I’ve posted Entry #435 to my Valuation-Informed Indexing column at the Value Walk site. It’s called Why I Call Buy-and-Hold a Get Rich Quick Strategy.

Juicy Excerpt:  If Fama is right, stock investing risk is a constant. How could any one investor know better than the market as a whole what the price of stocks should be? Since you cannot outsmart the market, all that you can do in deciding on a stock allocation is to assess how strong of a value proposition is offered by stocks in general. There are no better or worse times in which to own stocks.

However, if Shiller is right,stock investing risk is variable. The P/E10 level that applies tells the investor the amount of emotional content present in the market price at that time. Stocks offer a better long-term value proposition at low prices than they do at high prices. So informed investors adjust their stock allocation in response to big price shifts to keep their risk profile roughly constant over time.

I’ve posted Entry #434 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Stock Market Is Comprised of Humans.

Juicy Excerpt: John Bogle has written that: “I know of no serious academic, professional money manager, trained security analyst, or intelligent individual investor who would disagree with the thrust of the Efficient Market Hypothesis: The stock market itself is a demanding taskmaster. It sets a high hurdle that few investors can leap.” The headline to this article is my response. The stock market is not a demanding taskmaster. The stock market is comprised of humans. A good number of them know next to nothing about stock investing. Many of the humans who comprise the stock market invest in stocks because they have no choice — they want to be able to retire someday and they have been told that they must invest in stocks to have any hope of doing so. So they invest in stocks. But they have little interest in learning about the subject of stock investing. They are not demanding taskmasters.

Smart people invest in stocks too. Of course. But there is no rule saying that only smart people can invest in stocks. Nor is there any rule saying that smart people must always comprise a majority of investors. I’m not sure that even generally smart people could be smart enough to make the stock market a demanding taskmaster. A good number of the realities of stock investing are counter-intuitive. A smart person could be led to believe that the number on his portfolio statement tells him the real and lasting value of his investment. That’s not so, according to Shiller’s research. When stocks are priced at two times fair value, half of the amount reflected in that portfolio statement number is the product of irrational exuberance and possesses no lasting value. That one trips up lots of generally smart people. Lots of generally smart people do not behave in smart ways in the stock investing realm.

I’ve posted Entry #433 to my weekly Valuation-informed Indexing column at the Value Walk site. It’s called Finding a Middle Ground Between Buy-and-Hold and Valuation-Informed Indexing.

Juicy Excerpt: Say that an investor was thinking of retiring at a time when valuations were as high as they were in 2000 and the safe withdrawal rate was only 1.6 percent. Is there a way to permit a withdrawal closer to the 4 percent number favored by Buy-and-Holders without putting the retirement at excessive risk? There is.

The 1.6 number assumes an 80 percent stock allocation. Move the stock allocation down to 50 percent and put the remaining 50 percent in Treasury Inflation-Protected Securities (TIPS) paying 3 percent real (it was possible to obtain TIPS paying 4 percent in 2000, when the P/E10 level was 44) and you move the safe withdrawal rate to 3.4 percent. Accept a withdrawal rate that has only an 80 percent chance of working out for 30 years rather than a 95 percent chance and the number moves up again to 3.7 percent. That’s not quite 4 percent, but it’s not too terribly far off. It’s a compromise that might make neither “side” ecstatic but that both sides might be able to live with.

I’ve posted Entry #432 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stock Price Crashes of 50 Percent or More Are Not Acceptable.

Juicy Excerpt: It’s true that we cannot ban price crashes by putting up a sign that reads “Price crashes of more than 50 percent prohibited on these premises.” But the reality is that Shiller’s research tells us much of what we need to know to at least make price crashes of 50 percent or more a lot less common in the future than they have been in the past. Shiller showed that stock gains that result from overvaluation are the product of irrational exuberance rather than of economic realities. We can cut back or eliminate altogether big price crashes by working harder as a society to warn investors of the dangers of irrational exuberance and by providing them the tools needed for them to see that it is in their interest to invest more rationally than has been the custom in the past.