I’ve posted Entry #188 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller’s Mistaken Understanding of Why Only Long-Term Returns Are Predictable.

Juicy Excerpt: The term “noise” suggests a meaningless factor, a factor that need not be given much consideration. The Buy-and-Holders are using the term properly, Shiller is not.

Buy-and-Holders believe that the returns of greater than 6.5 percent real and the returns of less than 6.5 percent real pop up randomly. Returns are determined by unforeseen economic and political events, in the Buy-and-Hold Model. Thus, deviations from the normal return cannot be predicted. The deviations are noise, distractions from the reality you should be keeping in mind at all times, the reality that the average long-term return is 6.5 percent real.

Under Shiller’s model, the deviations are NOT random and meaningless events. The reason why returns are predictable in the Shiller model is that the model posits that it is investor emotions that are the primary determinant of price changes. Emotional extremes in one direction beget in time emotional extremes in the opposite direction. High prices increase the probability of price drops and low prices increase the probability of price rises. There’s nothing “noisy” (or random, or meaningless) about this process. It is the essence of how stock investing works, according to the Shiller model.

I’ve posted Entry #185 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Falling in Love With Your Inner Goon.

Juicy Excerpt: The Inner Goon is skeptical of new ideas. Shiller’s “revolutionary” (his word) findings were published 32 years ago and big names still promote Buy-and-Hold strategies to this day. That’s bad. Our skepticism is holding us back big time.

But skepticism itself is not a bad thing. The reality is that the Buy-and-Holders advanced many powerful insights. We want to be skeptical about challenges to those ideas. And once we come to accept the need to consider valuations when setting our stock allocations, we will want to be skeptical of challenges to the new orthodoxy as well.

If our minds become too flexible, we will find ourselves jumping from investing fad to investing fad. The idea that long-term timing is not required was a mistake. But it was a mistake that persuaded many good and smart people. We shouldn’t dismiss it too easily. I certainly wish that more people would question it more forcefully. But, trying to be objective about things, I can see that jumping from one core belief to its opposite should be done only with a great deal of caution.

I’ve posted Entry #185 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called There’s a Lot of Money to Be Made Promoting the Valuation-Informed Indexing Concept.

Juicy Excerpt: Once the dam breaks, people will see opportunities everywhere to do good while also doing well. Valuation-Informed Indexing totally rewrites the rulebook. We are going to need thousands of new books. We are going to need hundreds of new calculators. We are going to see new thought leaders replace old thought leaders, new web sites replace old web sites. Until now, the feeling has been that it is safer to align oneself with the conventional thinking. But there will be no saving the conventional thinking following another price crash. At that point, all those who have been holding  back from sharing their insights will be scrambling for position in the new order and even those who have advocated for Buy-and-Hold strategies in earlier days will be aiming to reposition themselves and thereby to remain relevant in a world in which everyone has become aware of the long unmentionable dangers of Buy-and-Hold strategies.

I’ve posted Entry #184 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Yearly Review Illusion: Short-Term Ups and Downs Have Little Effect on Long-Term Results.

Juicy Excerpt: I think it is yet another reason for rejecting the core Buy-and-Hold idea that the market is efficient. An efficient market would not remain either overvalued or undervalued for such long time-periods. It would jump from one state to another with more frequency. To understand why markets remain either overvalued or undervalued for so long, we have to take into consideration the role played by investor emotions and that of course means leaving behind us the possibility that the Efficient Market Theory is valid.

It’s exciting news that stocks remain overvalued or undervalued for long periods of time. It means that you don’t have to worry about missing out on gains or losses because you are slow to make moves. The best thing was to go with a high stock allocation in 1975. But if you missed that bus, another one came along in 1976 and then another in 1977 and then another in 1978 and on and on and on. It worked the same way when the long-term value proposition was headed in the other direction. You wanted to lower your stock allocation in 1996. But 1997 was another good year for doing so. And 1998 was yet another. And 1999 was yet another. And so on and so on and so on.

I’ve posted Entry #183 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called What Others Around You Believe About Investing Affects What You Believe About Investing.

Juicy Excerpt: At the close of the third day of discussions, I put forward a post saying that I now saw that I was wrong and apologizing for the trouble I had caused. My views on safe withdrawal rates have since been confirmed by some of the biggest names in the field. So I am often asked today what the story was with that crazy apology. Did I really believe that I was mistaken? Was I pretending? Or lying? What the heck was going on?

I still have good recall of the confused thoughts that were jumping around in my brain that night. I was confident that the studies were in error. It just isn’t possible that a study that doesn’t include a valuation adjustment could get the numbers right given that we know that valuations affect long-term returns. But logic wasn’t all that was in my head. There were lots of people whom I liked and respected who were very, very, very sure that the studies were just fine and that I was the one who was in the wrong. When you hear numerous people saying the same thing, it gives you pause.

I’ve posted Entry #182 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Real Reason Obama Is Having a Rough Presidency.

Juicy Excerpt: At times when valuations are on the increase, spending power is being pumped into the economy. At times when valuations are on the decrease, spending power is being removed from the economy. Voters care about economic results more than anything else. Any President who serves at a time when valuations are on the way downward struggles against a headwind. Any President who serves at a time when valuations are on the way upward enjoys a strong wind at his back. P/E10 values alone don’t determine which presidencies succeed and which one fail. But they can be a big factor.

I’ve  posted Entry #181 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s titled Eight Core Differences Between Buy-and-Hold and Valuation-Informed Indexing.

Juicy Excerpt: Buy-and-Holders give lip service to the idea that valuations matter. But they never consider the effect of valuations when giving investment advice. Their safe withdrawal rate studies contain no valuations adjustments. They recommend the same stock allocations at all price levels. They form judgments about how risky an investing class stocks are that suggest that stock investing risk is a stable thing rather than a variable thing (dependent on the valuation level).

I have posted Entry #180 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s titled Should We Assume That Stock Prices Are Predictable If There Is No Evidence Otherwise?

Juicy Excerpt: Markets depend on price discipline to function. It is because the person buying a car is trying to push the sales price down while the person selling the car is trying to push the sales price up that the car market is able to do a good job at setting the prices of cars roughly where they should be. When large numbers of investors come to believe that Buy-and-Hold strategies can work, price discipline disappears from the stock market and the market becomes dysfunctional. Eventually, prices rise so far from where they would be if market participants were practicing price discipline that the only way the market can continue to function is for prices to crash.

That all follows, doesn’t it?

I believe that it is this failure to research long-term timing that explains why two people as smart as Eugene Fama and Robert Shiller could come to opposite conclusions on the question of how stock investing works. Fama concluded that the market is efficient before Shiller published his research showing that long-term timing always works. Fama has tuned out Shiller’s findings for 32 years now because in his mind timing is out of the question. Had Shiller published his findings first, Fama would have put his mental energies to the task of developing a model to explain how stock investing works with the thought that price discipline is essential firmly established. Because of a quirk of historical timing, he instead came to the project with an entirely inappropriate hostility to research-based showings of the importance of one form of market timing.

I’ve posted Entry #166 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Last Week’s Nobel Prize Award Is an Acknowledgment That We Do Not Today Know How Stock Investing Works.

Juicy Excerpt: It was a diplomatic act to award the prize to both men. It was not a logically consistent act to do so. One of the two men is right about how stock investing works. One of the two men is wrong about how stock investing works.

By having the two men share the award, the committee is implicitly saying that they do not know how stock investing works; they are saying that this is today an open question.

That’s true. It IS an open question.

It is also an amazing and scary reality.

I’ve posted Entry #179 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Role of Shame in the Formation of Bull Markets.

Juicy Excerpt: You’re a teenager hanging out with a group of your teenager friends and one of them announces that he has obtained the fake identification needed to obtain alcohol for all of you. You feel uneasy about where things might lead.

That’s the dynamic that applies in the early days of a bull market. Lots of us know that the big price jumps are phony. But speaking up makes us look like killjoys. Everyone wants more money in his or her retirement account. No one else seems to be speaking out. What’s the harm, anyway?