I’ve posted Entry #169 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called An Alternative to Fama’s Explanation of Short-Term Price Changes That Also Fits Shiller’s Finding of Long-Term Return Predictability.

Juicy Excerpt: A perfectly rational market would indeed produce short-term randomness. But so would a perfectly irrational market. It is impossible to predict returns that are produced by unforeseen economic and political developments. But it is also impossible to predict returns that are produced by crazy shifts in investor emotions. Fama’s finding that short-term price changes are random supports the idea that the market is highly emotional every bit as much as it supports the idea that the market is highly efficient.

The difference between the two explanations is that Fama’s explanation for short-term randomness is discredited by Yale Economics Professor Shiller’s finding that long-term returns are highly predictable while the explanation that I am putting forward here is consistent with Shiller’s finding. Say that the market is highly emotional in the short term and that is why prices are random in the short term. Could prices be predictable (non-random) in the long term? They could. It could be that there is a second influence on prices that has little or zero effect in the short term but that comes to play a significant role in the long run.

I believe that investors are influenced both by emotions and by economic realities. They generally ignore the economic realities in the short term. But it takes more and more effort as time goes on for investors to push the common-sense realities out of mind. Eventually (it often takes 10 years or so for this to happen), the realities assert themselves. That’s when we see price crashes pulling stock prices back to where they would have been all along had investors made more of an effort to rein in their emotions.

I’ve posted Entry #168 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Five Similarities Between the ObamaCare Rollout Mess and the Buy-and-Hold Mess.

Juicy Excerpt: Buy-and-Hold too was rooted in good intentions. I hope that when opinions change on this investing strategy that they will not change so much that this will be put into question (I worry that it will). Millions of middle-class people need a simple way to tap into the power of stock investing. Buy-and-Hold provides it. To ignore valuations when setting your stock allocation is going too far with the simplicity concept. But the basic idea is a good one.

I’ve posted Entry #167 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Mathematics of Investing Is Overpowering — and Hated!

Juicy Excerpt: One of the slides quotes Former Financial Analysts Journal Editor Rob Arnott as saying something to the effect that it is easy to determine what stock returns are going to be if you know simple math and that it is amazing that there are so many smart people working in this field who do not seem capable of performing that simple math.

He’s making a point not too far removed from the point made by my blogger friend. Arnott is saying that there is no intellectual problem here — we could all know far more about how stock investing works he we cared to. We just don’t care to!

Why?

Because it causes us emotional pain to do the math he talks about.

If you want to be popular in this field, you hit fewer home runs. People don’t want to see you offer the best investing advice possible. That would be too “overpowering” to take. They want you to play dumb.

I’ve posted Entry #165 for my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called How Much Do You Need to Retire? Perhaps Less Than You Think!

Juicy Excerpt:  Risk reduces return. Buy-and-Holders don’t get this. Buy-and-Holders think of risk as a good thing. They believe that only risky asset classes can provide good returns. it follows that investors should seek out risk rather than avoid it.

I couldn’t possibly disagree more. I believe that investors should be perusing dual goals of always increasing return to the greatest extent possible while always also reducing risk to the greatest extent possible. Risk is bad. Where there is risk, there will eventually be losses. Losses are setbacks. You want to avoid setbacks. You want to avoid risk.

Now that we know how to reduce risk dramatically, we know how to increase returns dramatically. That follows.

So we can all use higher return assumptions on a going forward basis. If you are willing to take valuations into consideration when setting your stock allocation, you will avoid the losses that send others reeling backwards. Your higher portfolio amounts will compound more quickly. You will reach your retirement goals sooner.

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 #164 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called If Widely Held Views About Smoking Can Change, Widely Held Views About Investing Can Change Too.

Juicy Excerpt: I don’t think anyone truly believed that smoking is good for your health. So, in a literal sense, no, no one believed the stupid advertisements.

But it is important to remember that it is not the purpose of an advertisement to persuade through logic. One of the characters on Mad Men did a good job of explaining the purpose of advertising when she said that the idea is to persuade people to do what they want rather than what is expected of them. Advertising attacks the Super-Ego with the aim of making the consumerist Id more powerful.

The advertisements promoting the health benefits were aimed at people who already smoked. Research showed that these people were starting to develop concerns that smoking could kill them. So they were thinking of quitting or cutting back. The aim of these advertisements was to offer reassurance to people who wanted to smoke that it would be okay to continue doing so. The aim was achieved by putting forward absurdly deceptive claims that possessed emotional resonance because they gave people a reason to do something they very much wanted to do but which was beginning to cause pangs of conscience.

It’s the same story with the absurdly deceptive claim of the Buy-and-Holders that there is no need for investors to lower their stock allocations when prices rise to insanely dangerous levels.

I have posted Entry # 163 to my weekly Valuation-Informed Indexing column at the Value Walk site. It is called All of Today’s Investment Advisors Need to Warn Their Clients That Their Advice May Be Wildly Off Base.

Juicy Excerpt: So the right way to handle things is to say: “I believe that the best allocation for someone in your circumstances is 80 percent but I have to add that there are good and smart people out there who believe just as strongly and with research every bit as serious backing up their belief that 20 percent is the better choice.” The Valuation-Informed Indexers need to say it the other way around, of course.

It’s not a super message from a marketing standpoint. Investors don’t want to hear a wishy washy message. They pay experts to tell them what to do. They view an expert who fails to take a stand as an expert who is not doing his or her job.

So all investing professionals need to take a stand. We all need to be saying “I believe that 80 percent is best and that the research supports me on that point” or “I believe that 20 percent is best and that the research supports me on that point.”

The idea here is that we ALSO need to note that there is another strongly held viewpoint out there that is every bit as legitimate (at least in the eyes of some). It’s wrong to fail to mention that. Investors need to know that the research is not settled, that a respected economics professor has raised a challenge to the premises of the now-dominant model and that that challenge has not been effectively countered in over three decades.

I’ve posted Entry #  to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stock Overvaluation Hinders Economic Growth Far More Than Does the Budget Deficit.

Juicy Excerpt: The sad reality is that the same human weaknesses that causes the budget deficit draw us to Get Rich Quick investing strategies. The politicians aren’t doing the job they need to do, that much is so. But it’s not because politicians are by nature bad people. It’s because politicians need to get elected to remain politicians. And the politicians who take serious steps to address the deficit problem don’t win elections. The people doing the voting don’t want to hear the realities spoken out loud.

It’s the same story in the investing realm. The big shots in this field recommend Buy-and-Hold strategies. Not because they are bad people. Because that’s what sells. Everybody knows that spending more than you earn cannot lead to anything good and everybody knows that not taking price into consideration when buying stocks cannot lead to anything good. But we all like to pretend that we do NOT understand. So those who want to make it in the political realm play along with us. And those who want to make it in the investing realm do the same.

The problem is actually worse in the investing realm. The level of stock overvaluation that we have seen in recent years does far more harm to our goal of achieving economic growth than do today’s budget deficits.

I’ve posted Entry #161 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Only Thing Worse Than Buy-and-Hold Is Doom and Gloom.

Juicy Excerpt: Doom-and-Gloomers are cynical, in my experience. They are much more willing than Buy-and-Holders to acknowledge the problems that follow from excessive stock valuations. I obviously approve of that part of their story. But why the long face, you know? People dislike “bears” for a number of reasons. One is that they are perceived as whiny and negative. The Doom-and-Gloomers play to the stereotype for no good purpose, in my view.

I’ve posted Entry #160 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Common Theme in Our Saving and Investing Troubles.

Juicy Excerpt: In both cases, the big problem is that we humans focus too much on the short-term. We want to succeed at both saving and investing. But we give excessive weight to short-term feedback that misleads and discourages us.