I’ve posted Entry #648 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called If You Get the Safe Withdrawal Rate Wrong, You Get Everything Wrong.

Juicy Excerpt: It amazes me today that I didn’t understand all that on the morning of May 13, 2002. It seems so clear to me today. But the reality is that I really didn’t get it. To get safe withdrawal rates right, you have to understand how stock investing works. And, if you understand stock investing risk, you understand why market timing (considering price when setting your stock allocation) is so essential. It was by seeing the error in the Buy-and-Hold retirement studies that I came to see that the idea that market timing doesn’t work is the product of a mistaken understanding of how stock investing works that was exposed by Shiller’s research.

I’ve posted Entry #647 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stock Investors Have to Know That They Are Wrong All Along for Prices to Eventually Correct.

Juicy Excerpt: Investors must be at least somewhat rational. If they were not, the mispricing would continue forever. In fact, it would get worse over time. Investors misprice stocks for the same reason that bank robbers rob banks – that’s where the money is. When we push stock prices higher than they should be, it’s as if we are all voting ourselves raises. Why wouldn’t we do that?

But we don’t do it forever. We push stock prices up and up and up and then – down? We eventually push stock prices back down. Irrational exuberance is a temporary phenomenon. Why do we do this crazy thing that seems to run so counter to our self-interest?

I’ve posted Entry #646 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Valuation-Informed Investing Strategies Are a Powerful Anti-Marketing Force.

Juicy Excerpt: Google has a tool that lets site owners see what visitors to their site are doing there. You can use it to figure out what topics to focus on, that sort of thing. I used to watch new people come to my site, get excited about the saving material housed there, then stumble into one of my articles on stock investing and make a quick exit.

I’ve posted Entry #645 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Does Market Timing Become Less Important the Longer Irrational Exuberance Remains in Place?

Juicy Except: So the losses caused by failing to engage in market timing are usually much bigger than what the Buy-and-Holders anticipate. The other miscalculation they make is to underestimate the benefits of market timing. Stocks purchased when the CAPE value is 8 offer a 10-year annualized return of 15 percent real. You want to have as much money invested in stocks at CAPE values like that as possible. But of course those who followed Buy-and-Hold strategies may have seen their stock portfolios depleted by a good bit more than 50 percent before those juicy long-term returns become a live possibility. Because the market timers retained more of their assets when prices were crazy, they have more to invest in stocks when prices are amazing.

I’ve posted Entry #644 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stock Investing Risk Is Variable, Not Constant.

Juicy Excerpt: I do find fault with the people who came up with these ideas for one thing. They stated them too dogmatically. You sometimes hear people who believe in the efficient market concept refer to it as the efficient market hypothesis rather than the efficient market theory. That’s the right spirit.

It’s really just a guess. Guesses are fine. But they need to be distinguished from ideas that have been tested and found to possess some substance. That’s not the efficient market theory. There’s never been an iota of evidence to support this one.

Today there is a mountain of evidence showing that it does not check out. They put this one forward too soon. The efficient market concept is a half-baked idea or perhaps a quarter-baked one.

I’ve posted Entry #643 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called People Spend More When Stock Prices Are High.

Juicy Excerpt: But what if Shiller’s Nobel-prize-winning research is legitimate research? What if most of the stock gains of the past four years were just the product of irrational exuberance and did not possess any lasting economic significance? In that case, most of those gains will be going “Poof!” in the not-too-distant future. In that case, this woman should be continuing to live her life in the manner in which she was living it in the days before stock prices went insane. She should not be letting the irrational exuberance change her thinking about all of her spending choices.

I’ve posted Entry #642 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Great and Obvious Appeal of Irrational Exuberance.

Juicy Excerpt: Stock drunk. That’s a term that I came up with years ago to describe the phenomenon. Buy-and-Holders don’t like it when I use that term. I understand why. It sounds insulting. But it is not my intent to insult. My intent is to understand and to describe. If we cannot name the thing that is causing all the trouble, we will never be able to overcome that thing. Irrational exuberance is a devilish customer. We won’t overcome it by keeping Shiller’s book stocked in the libraries but holding back from discussing openly and frankly what it tells us about the need to go to battle with our inner desire to have something for nothing, the Get Rich Quick urge that drives all this business about not needing to change our stock allocation when prices go nuts.

Have you ever heard anyone else talk like this? Use terms like “stock drunk” to explain today’s CAPE value? It’s not done. That’s why the CAPE value is so high. That doesn’t just happen. It happens because there is something inside us that lets it happen, that wants it to happen. We are all stressed financially. Each and every one of us. The phony gains that appear on our portfolio statement in the form of irrational exuberance ease those concerns. That’s the story.

I’ve posted Entry #641 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Implicit in the Idea That Market Timing Is Not Required Is the Idea That Stocks Always Offer Equal Value.

Juicy Excerpt: Implicit in a belief that market timing is not required is a belief that stocks always offer equal value. Does anyone really believe that? I don’t believe that there are very many who do. Investors get it that high stock prices diminish the value proposition of stock purchases. But few appreciate how much the value proposition is diminished when prices reach the level where they reside today because experts in this field rarely encourage them to perform the calculations they would need to perform to assess how much the value proposition is compromised when prices reach scary levels. We live in the dark re the true value of the stocks we own because we want to believe that the numbers on our portfolio statement are real despite a mountain of evidence that that is very much not the case.

I’ve posted Entry #640 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Much of the Wealth Destroyed Through the Creation of Irrational Exuberance Is Never Recovered.

Juicy Excerpt: Say that as investors we create $12 trillion of irrational exuberance in a long bull market and then watch it disappear in a price crash/economic crisis. That sounds bad. But is it really so terrible? Had there never been a bull market, we never would have experienced neither the phony gains nor the sudden loss of them. Skip both the exciting bull market and the scary price crash that inevitably followed it and we would have broken even. Isn’t that right?

 

Not quite.

 

The dollar values that appear on our portfolio statements send signals re all sorts of economic behavior. When the signals are wrong, the behavior is wrong. And making bad economic decisions causes financial losses.

I’ve posted Entry #639 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Statements Discouraging Market Timing/Price Discipline Are Wealth Destroyers.

Juicy Excerpt: Every time someone gives voice to the idea that market timing (exercising price discipline when buying stocks) is not necessary, $10,000 of wealth is destroyed.