I’ve posted Entry #390 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Irrational Exuberance Affects a Lot More Than Just Stock Prices.

Juicy Excerpt: How is the economy likely to perform in coming years? That’s determined largely by the amount of irrational exuberance reflected in today’s stock price.

Will the level of political unrest be increasing or diminishing in the near future? That’s another irrational exuberance question.

Are young people going to be able to achieve the incomes needed to move out of their parents’ houses? Yet again, you need to check out the irrational exuberance story to determine the answer to this one.

I’ve posted Entry #389 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller’s Economic Insights Are More Important Than His Investing Insights.

Juicy Excerpt: When Shiller says that valuations matter, he is challenging Adam Smith, the father of Classical Economics. Smith is the fellow who came up with the Rational Man concept. Almost all economic arguments begin with an assumption that people act to pursue their self-interest. If that were so, valuations wouldn’t matter because overvaluation and undervaluation would not exist. It is in the best interest of investors to price stocks properly. Buy-and-Holders get this; this is why they don’t worry about valuations — mispricing cannot be a problem in a world where investors are rational. When Shiller says that valuations matter, he is saying that Adam Smith is wrong, that the decisions of investors (and all other economic actors) are rooted in emotion as often as they are rooted in the rational pursuit of their self-interest.

I’ve posted Entry #387 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Dilemma of the Investor Who Elects to Follow a Research-Based Strategy.

Juicy Excerpt: The same Get Rich Quick emotions from which investors are turning to research for protection influence their decisions as to which research to follow!

I’ve posted Entry #386 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Today’s Stock Price Is an Illusion.

Juicy Excerpt: The true price (that is, the one that reflects all that is known about the value of stocks at a particular point in time) is influenced by the valuation level (since the valuation level affects the long-term return). But for the valuation level to influence the price would be for the overvaluation or undervaluation to disappear. So, whenever overvaluation or undervaluation is present, the stock price that applies is illusory. It is a pretend price, a price that remains in place not because it makes sense but only because we investors prefer it emotionally to the real price.

I’ve posted Entry #385 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Confidence in Buy-and-Hold Is Rooted in the Small-Sample-Size Fallacy of Statistical Analysis.

Juicy Excerpt: If you talk to Buy-and-Holders, they will tell you that their strategy has been working for a long time. The annualized real return on stocks from 1982 through today is 8.9 percent. That’s an amazing return. And 36 years is not a short stretch  of time. It’s certainly not the sort of time-period that anyone would ordinarily describe as a “Small-Sample-Size.”

I believe that in the stock investing realm it may be just that. I think it may be this odd phenomenon — the way in which a time-period that stretches out for over three decades is in an important sense not a long time-period at all — that causes the subject of stock investing to be so confusing for so many.

Stock prices play out in a hill-and-valley pattern that usually extends for about 35 years (the bull/bear cycle that is nearing an end today is the longest yet seen in the historical record). Valuations move gradually upward during the early years of the cycle. It can take 20 years before they hit the dangerous levels that cause the upward movement to break. And then they can take years either moving gradually downward or remaining at low levels.

I’ve posted Entry #384 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called There’s a Risk Attached to Lowering Your Stock Allocations When Prices Are High.

Juicy Excerpt: Stock prices bottomed out from the 2008 crash in March 2009. In the nine years since, prices have increased over 260 percent (assuming reinvestment of dividends). The annualized real return has been 16.8 percent. Stocks were not overpriced in March 2009; valuations were slightly below fair-market value levels. But valuation-informed investors were wary of stocks even at those prices. Stocks had been overpriced for many years at that time. So there was a belief among many that, once prices began to fall hard, they would continue to do so. Buy-and-Holders, on the other hand, generally argued that the price drop created a buying opportunity. I think it would be fair to say that the Buy-and-Holders feel vindicated by the performance that we have seen from the stock market over the past nine years.

Would they still feel vindicated following a 50 percent price drop? A $100,000 lump sum invested in stocks in March 2009 would be worth $360,000 today. A price drop of 50 percent would bring that amount down to $180,000. That’s still a significant gain. A gain of $80,000 on a $100,000 investment over only nine years is a gain of a good bit more than the average long-term stock return of 6.5 percent real and certainly a gain much greater than what was available from most other asset classes during that time-period.

So valuation-informed investors missed out.

I’ve posted Entry #383 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Eight Implications of Shiller’s Finding That Valuations Affect Long-Term Returns.

Juicy Excerpt: If stock investing risk is variable, investors who care to can minimize their lifetime investing risk by investing in stocks to the same extent as Buy-and-Hold investors over the course of a lifetime but investing more heavily in them at times when risk is low and by investing less heavily in them when risk is high. Stock investing risk is to a large extent optional for investors open to taking valuations into consideration when setting their stock allocations.

I’ve posted Entry #382   to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Does It Help to Add a Moving Average Component to a Valuation-Informed Stock Investing Strategy?

Juicy Excerpt: A member of the Bogleheads Forum recently started a thread (“Using CAPE to Time Market?”) in which he expressed a view that the reason why using valuations alone to adjust one’s stock allocationis unsatisfying is because CAPE doesn’t predict short-term market moves. He sought feedback on whether it might be a good idea to combine the use of Shiller’s CAPE valuation metric (P/E10) with an examination of moving averages. The idea would be that the risks of using moving averages to time one’s allocation changes would be mitigated by making reference to the P/E10 level, which would signal to the investor times when severe price drops were more likely. The community member explained: “According to this strategy, I would follow a moving-average sell rule only when CAPE is high. At other times, I would refrain from using moving-average timing.”

I don’t think much of the idea.

I’ve posted Entry #381 to my weekly Valuation-Informed Indexing column at the Value Walk site.It’s called The Stock Market Cannot Tell Us Which Economic Policies Are Best.

Juicy Excerpt: The benefit of citing the stock market’s verdict on his policies is that he is citing what most people view as a neutral source. Policymakers are viewed as biased, economists are viewed as biased, journalists are viewed as biased. The stock market? Stock prices are determined through a process in which incredibly smart people make ruthlessly self-interested, rational decisions. The stock market is not biased. The stock market is objective and hard-nosed. What the stock market concludes re a policy affecting the economy counts.

It’s not so.

I’ve posted Entry #380 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called If Shiller Is Right, Stock Gains Are Often Not a Good Thing.

Juicy Excerpt: Shiller revolutionized our understanding of how stock markets work because he showed that it is investor emotion that determines stock prices, not economic developments. If that is so, then upward movements in prices are not necessarily a good thing. They are a good thing when stocks are underpriced and when the upward movement thus pushes prices closer to fair-value levels, And then are a good thing when stocks are priced at fair-value levels and the upward movement is not more than the 6.5 percent real annual return that is justified by the economic realities. But upward price movements beyond that are not a good thing at all. Upward price movements beyond that hurt stock investors by making financial planning more difficult than it needs to be and by making our economic system less stable than it would otherwise be (price crashes cause recessions by dramatically reducing consumer buying power).

So price gains are not always a good thing. The best thing for stock investors would be if prices always remained somewhere near fair-value levels. Price gains that push prices well beyond fair-value levels are in fact a negative.