I’ve posted Entry #278 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Our Investing Biases Are Particularly Dangerous Because They Are Time-Based Rather Than Phenomenon-Based.

Juicy Excerpt: The most important investing biases are time-based rather than phenomenon-based. That means that for long periods of time certain ideas are forgotten by almost the entire population. To tap into the other side of the story the investor would have to study historical data from a time-period many years removed from the current time-period. Who does that?

Shiller showed that valuations affect long-term returns. What he really was doing when he did that was showing that the stock market is not efficient, that mis-pricing on either the high or low side is a significant reality rather than the illusion that Buy-and-Holders believe it to be. Even during the most out-of-control bull market, there are a small number of people questioning whether the insane prices achieved are real and lasting. But the percentage of the population holding that view can be very small indeed. The percentage of the population that is conservative rather than liberal doesn’t vary dramatically from time to time. The percentage of the population that believes that stocks are the perfect investment choice is dramatically higher when prices are high than it is when prices are low.

For a good number of years following the great crash of 1929, investors didn’t expect to see any capital appreciation at all on their stocks. The conventional wisdom of the time was that stocks were worth buying only for their dividends; those that didn’t pay high dividends were not worth owning. In the late 1990s, dividends fell to tiny levels. The very thing that made stocks dangerous (their high price) changed the conventional wisdom on stock ownership to reflect a bias that stocks are always worth owning.

Stocks for the Long Run was a popular book in the 1990s. It would not have sold many copies in the 1930s. The book reports on data, facts, objective stuff. The message of the data should not change from times like the 1930s to times like the 1990s. But the ways in which we arrange the data and interpret the data changes when we go from bull markets to bear markets. People will be looking at the same data that was employed in Stocks for the Long Run to sell stocks to make the case against stocks when we are on the other side of the next stock crash.

I’ve posted Entry #277 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called If We Can Change Smoking Behavior, We Can Change Investing Behavior.

Juicy Excerpt: There is nothing that anyone could have said in earlier days to persuade me that tight restrictions on smoking were a good idea. But over time I have come around, at least to some extent. Changes that cannot be achieved overnight in many cases can be achieved gradually.

Most people today view the idea that investors should change their stock allocations in response to big valuation shifts as an “out there” idea. And it probably is not realistic to think that most people will change their thinking on the subject overnight.

But I believe that we will see big changes take place if those of us who believe in Shiller’s research make the case in a clear and firm and non-apologetic way. We won’t win the battle in a day. We will take small steps forward followed by more small steps forward. But one day we will look up and see that we have walked a long ways.

It all starts happening when we work up the courage to speak up. So long as we view the end goal as unattainable, we remain stuck in a world where stock investing is a far more risky activity than it should be. We need to be like my friend at the restaurant and express our concerns. Some will look funny at us (I know how it goes). But we will win them over in time if we continue to fight the good fight.

I’ve posted Entry #276 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called How I Rationalized My Belief in Buy-and-Hold for Six Years.

Juicy Excerpt: I knew that the safe withdrawal rate studies did not contain adjustments for the valuation level that applies on the day the retirement begins. I told myself that it didn’t matter because valuations probably don’t make that big a difference (I was of course careful not to check whether this is actually so or not). Or I told myself that at least the Buy-and-Hold retirement studies were better than most non-Buy-and-Hold retirement studies (that was so but they of course would have been even better yet if valuation adjustments were added). Or I told myself that the people promoting Buy-and-Hold were smarter than me (true) and must have known about aspects of the question that I wasn’t aware of (this one turned out not to be true once I got around to investigating the matter).

I’ve posted Entry #275 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Saving and Investing Go Together Like a Horse and Carriage.

Juicy Excerpt: We fail to seek strong value propositions with our investing dollars for the same reasons we fail to seek strong value propositions with our spending dollars. You see a car that you cannot afford today and a voice in your head tells you to put the budget aside and buy it because life is hard and you deserve nice things. You worry about your retirement and you want to reduce the worry and you are drawn to the idea of treating those Pretend Dollars as real ones because doing so creates the illusion of moving you closer to your financial independence goals.

We are flawed creatures. But Shiller is popular, his book was a best-seller. We learn over time. We advance in our understanding of things. We’re not so bad.

I’ve posted Entry #274 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Valuations Are 80 Percent of the Stock Investing Story.

Juicy Excerpt: How much would you say that price matters when buying a car? It’s certainly not the only factor. You need to be sure that a car is well-made. A poorly designed car is not a good deal even at a low price. And you need to be sure that the car you buy is one well-suited to your needs. Someone who desires a sports car will not be happy with even a well-designed family van. And there are lots of personal considerations that need to be taken into account. Some people like red cars. Some people like black cars. Getting the color right can add a good bit to your enjoyment of the car you buy.

Still, I think it can be said that researching prices and negotiating a good deal on price is 80 percent of what makes one a successful car buyer. Getting the color right is easy; you just need to be willing to drive to a second dealer if the first one you visit does not have the right color in stock. And it doesn’t take too much effort to identify the best style of car to satisfy your particular needs. We all know what is out there. You might need to check out a few vehicles to decide which particular sports car or which particular family van is right for you. But it is not difficult to get that aspect of the car-buying experience settled in your favor. Nor does it take much research to learn which cars have a reputation for being built well.

Getting the price right is harder. If you accept the dealer’s price, you are almost certainly going to overpay by hundreds of dollars and quite possibly by several thousand dollars. If you do enough research to enter the dealer’s lot with confidence that you know the fair market value of the vehicle that you intend to purchase, and are willing to invest the time and energy needed to negotiate a good deal, you are going to enjoy a huge dollar return for the hours invested. You can improve your car deal by thousands of dollars by working the price aspect of the matter, potentially turning a very bad deal into a very good deal by focusing on this all-important issue.

There is now 34 years of peer-reviewed research telling us that it works precisely the same way when buying stocks rather than cars.

I’ve posted Entry #272 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called How a Visit to the Dentist Is Like a Visit to an Investing Analyst.

Juicy Excerpt: For a long time, most of the work done by humans was done in the physical realm. A time came when we learned to make machines and achieved great advances by enjoying the leverage that comes when an internal combustion engine does the pushing rather than our legs. We gained even more leverage when we entered the Information Age and developed ways to quickly spread knowledge of better ways to do things far and wide.

In the next stage we will learn together how to manage our emotions more effectively. We will retire earlier. And we will have better teeth!

I’ve posted Entry #272 for my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Bernstein’s Revolution in the Treatment of Diabetes Mirrors Shiller’s Revolution in Our Understanding of How Stock Investing Works.

Juicy Excerpt: In 1970, the medical community believed that the consumption of fats was dangerous. The consumption of carbohydrates was encouraged as a means of keeping fats consumption low. The reality proved by Richard Bernstein in the years since is that it is carbohydrates that are the real killer in the American diet and that fats are harmless in comparison. The Bernstein revolution (an approach to the treatment of diabetes in which a super-low carbohydrate diet is encouraged) was slowed because the “experts” in the field had fallen in love with an idea (that carbohydrates were okay and that fats were bad) that at one time was given some support in the literature but that had never been sufficiently proven to justify its status as dogma.

The parallel is that, prior to 1981, the investing advice community believed that market timing was always a bad idea. The reality proved by Shiller is that, while short-term timing never works, long-term timing always works and is always required for investors seeking to keep their risk profiles roughly constant. Again, the experts have had a hard time acknowledging the error. Experts don’t like to acknowledge their human fallibility. So they have an inclination to go into denial when new research is done showing that their too-hasty conclusions re the meaning of earlier research need to be reconsidered.

I’ve posted Entry #271 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called A Story From My Own Life That Shows the Power of the Self-Deception That Also Causes Stock Booms and Crashes.

Juicy Excerpt: I even have a particular reason for taking diabetes seriously. I had an uncle who had to have his legs cut off because he failed to change his diet after being diagnosed. I remember thinking as a teenager how horrible this was. It’s bad enough to lose one’s legs. But to lose them because you didn’t take an action that you knew was needed to prevent the loss — that’s doubly horrible. My uncle — one of the self-deluded humans — did that. Knowing what happened to him as a result of his delusions, I walked a good ways down that same path over the past two years. I’m a mess!

We all are.

That’s the point of Shiller’s “revolutionary” (his word) finding of 1981 that valuations affect long-term returns. If Shiller is right (there is now a mountain of evidence showing that he is), the mis-pricing of stocks is a real phenomenon. When stock prices rise to the levels that they rose to in the late 1990s, we are borrowing from our future selves and we have to pay the money back in years to come.

I’ve posted Entry #270 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called A Critic of Valuation-Informed Indexing Offers a Concise Case for Why Buy-and-Hold Is Superior.

Juicy Excerpt: People can refine, add gimmicks, accessories, etc, or even purposefully misconstrue (AHEM, looking at YOU, Rob!) but to me, THIS is the essence of buying and holding. So, for you to go on a decades-long intense daily public jihad against those principles, and the people who espouse, and apply them, seems frankly… well, insane.

You are free to use whatever market timing scheme, or other method you chose to invest, or course. But for you to characterize the above technique as “Get Rich Quick,” just to irk people and to hopefully draw attention to yourself, shows how both intellectually feeble, and also morally challenged you are. (I dare you to publish this.)

I’ve posted Entry #269 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Eight Questions That Should Be Keeping Buy-and-Holders Up at Night.

Juicy Excerpt: Yale Economics Professor Robert Shiller showed in peer-reviewed research published in 1981 that valuations affect long-term returns. That “revolutionary” (Shiller’s word) finding changed everything we thought we knew about how stock investing works. If valuations affect long-term returns, stock risk is variable rather than fixed; that means that we can reduce risk by taking valuations into account when setting our stock allocations. Shiller’s book exploring this finding in depth was a national bestseller. He was awarded a Nobel prize for his work.

Given the importance of this advance in our understanding of how stock investing works, one would have expected that the Buy-and-Holders would have made scores of changes to their strategy to reflect the new understanding. Can the Buy-and-Holders identify even ten changes?

Can they identify even one?