A Rich Life

Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

Who is a goon and who is not a goon?  Will you be finally revealing the names of all the goons in your book?

We all have goonishness within us. We all want something for nothing. We all are drawn to Get Rich Quick/Buy-and-Hold strategies to get it. A society does not get to a CAPE value of 36 because of a few individuals on the internet with outlier personalities. We all to some degree want to abandon our irrationality so we can “enjoy” irrational exuberance” as if it were something real. It is human nature that is responsible for most stock investing risk. We all do our part to push stock prices up to unsustainable levels and we all suffer the consequences of doing so.

But there are degrees. Most of us have that goonishness within us and thus feel some sympathy for the Buy-and-Hold case. But 90 percent of us would never in a million years advance a death threat or engage in an act of extortion. It is the true Goons who do that sort of thing, the people who feel that life would not be worth living if honest posting re the last 40 years of peer-reviewed research were permitted and if people were thus able to hear about the downside of going with a pure Get Rich Quick/Buy-and-Hold strategy.

Since the vast majority of us are not pure Goons, the normal state of affairs would be that the Normals would rein in the Goons when they got totally out of hand. We have seen hundreds of efforts to do that. But those efforts tend not to be sustained because the 90 percent who are not true Goons themselves do have sympathies for the Get Rich Quick/Buy-and-Hold position. The 90 percent rationalizes. They say: “Oh, it’s not so bad.” They tell themselves: “It is not my job to put my neck on the line to fix this, let someone else do it.”

The question is — Will that change after the next price crash, when millions of Normals see most of their life savings disappear into thin air? If the Normals elect to speak up, you Goons are finished and we will all live far richer and better lives from that point forward. From that point forward, everyone in this field will be doing all that he or she can to SUPPRESS the Get Rich Quick/Buy-and-Hold urge, not to do everything imaginable to take the Get Rich Quick “idea” to places to which it has never been taken before.

Goonishness is irrationality. The purpose of research is to put reason to use to help us all live better lives. Thus, you Goons HATE the last 40 years of peer-reviewed research with a burning hate. The Normals do not hate the research. They are not happy with the thought that their retirement portfolios are worth only 40 percent of what they have been led to believe that they are worth. But they support the laws against death threats and against extortion. In theory, they support the idea of permitting rational discussion. They are torn today between their respect for rationality and their love for temporary fruits of Get Rich Quick “strategies.”

I think rationality will prevail over goonishness in the end. I don’t believe that our economic and political systems can survive if they do not, But we are today at the second highest CAPE value ever seen in U.S. history. It would be fair to say that rationality is not even a tiny bit popular in Investoworld today, Goonishness is king at this moment in time.

I believe that the history of the human race is the story of an effort of the humans to overcome their gooonishness, to become more rational and to become able to live better lives. So I believe that Valuation-Informed Indexing is going to prevail. But I would, wouldn’t I?

Rob

Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

For more than a decade you have been confident that your VII will finally work and you have also been confident that you will get a settlement payment.  Unfortunately, none of that ever materialized.  It is obvious that you need another plan.

That’s like saying that the people who didn’t invest in the Madoff fund in the years before it was exposed as a fraud needed another plan because the Madoff fund made tons of money for a long time. No. Either Shiller’s Nobel-prize-winning research is legitimate research or it is not. I believe that it is legitimate research. So my plan is to tell people about it and to make money as a journalist doing that.

If Shiller’s research is legitimate, then any strategy not emphasizing the importance of market timing is a scam. Most people may not appreciate how much falling for the scam can hurt them until the scam is exposed in a price crash. But just about everybody will get it once the mountain of irrational exuberance disappears into thin air. You are the one who needs a new plan. Get Rich Quick strategies remain popular only for so long as prices remain sky high. And they never remain sky high indefinitely. Shiller’s research shows that.

I think my plan is a winner. Get Rich Quick/Buy-and-Hold remains popular today. I see that. But I do not believe that it is going to remain popular after it has destroyed millions and millions of lives. My plan for 19 years now has been to go with the research. That remains my plan. The pure emotion stuff just doesn’t appeal to me.

We’ll see.

Rob

Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

“Shouldn’t we quantify the problem by pointing out that a 75 percent price drop is not out of the question?”

To the opposite, a 75% increase can also happen. No one can predict the market. Further, hills and valleys are just normal patterns, yet the market has always continued to grow in the long term. The buy and holder has always been rewarded, while the market timers have yet to see any success.

We disagree.

It is true that market returns cannot be predicted with precision or in the short-term. But there is a strong correlation between today’s valuation level and the market price that will apply in 10 or 15 or 20 years. Robert Shiller was awarded a Nobel prize for his “revolutionary” (his word) research showing this. In the days when Buy-and-Hold was developed, this was not known. It was thought that the market was efficient (that is, that future stock prices could not be predicted and that long-term timing was not required for investors seeking to keep their risk profile stable). We all need to move on from Buy-and-Hold to Valuation-Informed Indexing. For that to happen, we need to open every discussion board and blog on the internet to honest posting re the last 40 years of peer-reviewed research in this field, That’s the first step in the huge learning experience that we all have in front of us.

A 75 percent price increase could happen. But if such a price increase took place starting from today’s price, it would all be irrational exuberance. So it would offer no lasting benefit to stock investors. In fact, it would hurt them. It would cause them to become confused about their financial status and thus make it hard for them to manage their financial affairs. And it would destabilize the economy because the inevitable price crash would cause hundreds of thousands of businesses to fail and millions of workers to be thrown out of their jobs.

Hills and valleys that cause the CAPE level to rise to 35 are NOT normal. Such extremes could never take place in an economy in which stock investors had access to honest and accurate reports of what the last 40 years of peer-reviewed research teaches us about how stock investing works. In such a world, stock prices would be self-regulating. Extreme high prices would cause investors to sell stocks and that would bring prices back to reasonable levels. In a world in which honest posting was permitted and the market was permitted to function normally, the CAPE value would probably never go below 12 or above 20.

Market timing has been working for 150 years. That’s as far back as we have good records of stock prices. The peer-reviewed research that I co-authored with Wade Pfau shows that beyond any doubt whatsoever. That’s why Wade declared after 16 months of researching the matter from every angle possible that: “Yes, Virginia,Valuation-Informed Indexing works!”

My best wishes to you.

Rob