I’ve posted Entry #217 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller Believes in Short-Term Timing.

Juicy Excerpt: The article goes on to point out that the P/E10 level is now at the fourth highest point it has ever reached in the history of the U.S. market and that the three higher peaks all produced stock crashes. But it reports that Shiller’s belief is that today’s P/E10 level “might be high relative to history but how do we know that history hasn’t changed?” Shiller believes that the long-term average for the valuation metric is “highly psychological.” He believes that “you can’t derive what it should be.” The article reports that: “The [P/E10 value] is most accurate in forecasting a market move when the ratio is at an extreme, but now it is only at 25.3, not far from the the 30-year average of 23.4.” He adds one of the things he is looking for to determine whether we are at a “turning point” is a showing that the economy is stuck in the muck.

 

I’ve posted Entry #216 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Did Shiller Change Anything?

Juicy Excerpt: But how much has the conventional advice on how to invest in stocks changed as a result of the “revolutionary” research that Shiller published in 1981 (and that has been confirmed many times in the three decades since).

Not at all.

If you are able to identify any changes, I’d be grateful if you would point me to them. My sense is that everything is pretty much the same. Shiller’s ideas have not been debated or discredited in any way. They have been ignored.

I’ve posted Entry #__ to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Difference Between a Model for Understanding How Stock Investing Works and an Investing Strategy.

Juicy Excerpt: The problem is that the people who engage in tactical asset allocation are not clear on when allocation changes should be made or how large they should be on how they will know whether the changes will be successful or not. I can easily imagine someone making a tactical shift downward when prices crashed in late 2008 and then another tactical shift upward when prices took off again (on grounds that the risk of a total economic collapse had passed). This is of course the opposite of the strategic shifts that a Valuation-Informed Indexer would make (we increase our allocations when prices drop and increase them when prices rise). But it is the sort of change that is made by someone who is thinking tactically rather than strategically.

I’ve posted Entry #214 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Is It Possible That Valuations Affect Long-Term Returns But That Predictions Do No Work?

Juicy Excerpt: The book The Myth of the Rational Market does a fine job of explaining the history of explaining how we got to the strangeTwilight Zone period of understanding how the stock market works that we live in today. It explains how the idea that the market is efficient was disproven but then stops short of saying what that signifies for those seeking to invest effectively.

If the market is not efficient, we all must be sure to adjust our stock allocations in response to big price swings so that we can keep our risk profiles roughly constant. The book doesn’t reach that conclusion, It explains why the old ideas on how stock investing works have been discredited. But it then cops out on the matter of describing new ideas. It suggests that, even though all the reasons for believing that Buy-and-Hold strategies might work have been disproven, it still might be a good idea to follow such strategies.

I find zero merit in this line of thought. I am often tempted to conclude that the people pushing it do not believe themselves in what they are saying. But I must say in all fairness that all signs are that the DO believe. Many smart and good people sincerely believe that Buy-and-Hold strategies make sense even though the theory supporting these strategies was shot down three decades ago. As amazing and as scary as that reality is, that’s the reality of where things stand today.

 

I’ve posted Entry # 213  to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Reader Comments at the New York Times Article on Shiller’s Nobel Prize.

Juicy Excerpt: It strikes me as excessively cynical to conclude that financial payoffs are the primary problem. They are a problem, however. And they are a problem with broad political implications. Journalists should be looking into this aspect of the story. There is a Pulitzer waiting to be awarded to the journalist who breaks the story of why the implications of Shiller’s breakthrough insights have been ignored for so many years and at a time when the continued viability of our system of government depends on our getting the word out to millions of middle-class people who are depending on their stock investments to finance their retirements.

I’ve posted Entry #212 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Warning Implicit in Outlier P/E10 Values Should Not Be Rationalized Away.

Juicy Excerpt: There’s a funny dynamic that governs our rationalizations for not taking P/E10 levels into consideration when deciding on our stock allocations. When the P/E10 level rises to high but not insanely high levels, we say that moderately high P/E10 aren’t really all that dangerous. When the P/E10 level rises to insanely high levels, we say that the results that logically follow from insanely high P/E10 levels are so absurdly bad that it is impossible that the P/E10 metric will continue to worksas well as the entire 140-year history of the market shows that it performs. If P/E10 worked as well as it appears to work, we never would have permitted things to get so out of hand, say the people who counseled ignoring merely high P/E10 levels on grounds that anything less than insanely high P/E10 levels were not worth worrying about.

I’ve posted Entry #211 to my weekly Valuation-Informed Indexing column at the Value Walk site. it’s called Fama Acknowledges That We Don’t Know What Caused the Great Depression.

Juicy Excerpt: What is the first thing that comes to mind when you think of the Great Depression? It’s the Great Stock Crash of 1929. People’s fortunes being lost. People jumping out of windows. People selling pencils and apples on the street corner. That sort of thing.

Every sensible person connects those two events in his or her mind. It’s only one group of people that doesn’t — Economists. And how sensible are they? Seriously, there is an obvious connection between the two events. The only reason why it is not conventional wisdom that the Great Crash caused the Great Depression is that economists generally have not connected the two.

I have been saying that it was the popping of the stock bubble of the late 1990s that caused the economic crisis that we are struggling through today (which will likely bring on the Second Great Depression if Shiller is right that we have another price crash in our not-too-distant future). The only argument that people who disagree with me have been able to come up with is that that is not what the economists say. But Fama is now spilling the beans and acknowledging that the economists do not know.

I’ve posted Entry #210 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller Is Weak re the How-To Aspects of Stock Investing.

Juicy Excerpt: The primary reason why people buy investing books is to learn what to do with their money. Irrational Exuberance is amazing on theory. But Shiller devoted only two paragraphs of his masterwork to the how-to questions.

Here is what he says: “So what should investors do now? The natural first step may be, depending on current holdings and specific circumstances, to reduce holdings of U.S. stocks…. But there is a fundamental difficulty with advising individuals and institutions to get out of the stock market. If such advice were taken by large numbers, it would cause an immediate drop in the level of the market. In fact, we cannot all get out of the market. We can only sell our shares to someone else. Somebody must be left holding the outstanding shares. As a group, those unfortunate people who bought in at a market high have already made their mistake, and we cannot correct it for them after the fact.”

I’ve posted Entry #209 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called No P/E10 Value Signifies the Same Thing At All Times.

Juicy Excerpt: It’s also important to keep in mind that P/E10 values do not pop up randomly. There is a pattern that has applied for the entire 140 years of stock market history. Prices start out low. Then they rise steadily for perhaps 20 years. Then they fall sharply and remain low for perhaps 10 years. Prices behave in that matter because the natural impulse of investors is to push prices up. They continue doing this until their common-sense understanding that there are limits to how high prices can go kicks in to cause prices to crash. Then the economic devastation that follows from the huge loss in consumer buying power causes investors to hate stocks for a good bit of time.

A P/E10 value of 15 represents fair-value pricing for stocks. But a P/E10 value of 15 signals something very different when prices are on their way up to a P/E10 value of 25 or more than it does when prices are on their way down to a P/E10 value of 8 or less.

 

I’ve posted Entry #208 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Why I Write Only About Valuation-Informed Indexing.

Juicy Excerpt: In other fields, we learn new things and we move ahead. In the investing field, we learn new things and — we ignore the new things we have learned.

I believe that the reason why we do this is not that investing doesn’t matter but that it matters too much. We cannot bear to acknowledge having made big mistakes in our investing strategies because we know that making big mistakes in this area delays our retirements. So we are in denial about what we learned from Shiller. We aren’t going to acknowledge this mistake until it wrecks us.

When that happens, we are going to realize that we have missed out on 33 years of learning experiences. We will enter a new world, one in which there is no legitimate argument over whether we need to adjust our stock allocations in response to big valuation shifts but only over what tools we should use to determine how big an allocation adjustment is needed in different circumstances.