Is valuation-based market timing really market timing?

I am an advocate of valuation-based market timing. In a world where valuations impact long-term timing (the world we live in, according to Robert Shiller’s Nobel Prize-winning research), valuation-based market timing is critical. It is a means of curbing irrational excesses before investors get out of control and cause price crashes and economic collapse.

Buyers and holders work against market timing.

A Powerful Case for Valuation-Based Market Timing

The argument for valuation-based market timing is so strong that I sometimes wonder if long holders are thinking about valuation-based market timing when they make statements against market timing. In fact, there have been many instances where I’ve looked at market timing against buy-and-hold, and then explained the problems with the guessing game approach to market timing to explain the opposition. Buy-and-Hold may point out that for market timing to work properly, investors must be accurate in their guesses about when to lower and when to increase their stock allocations. Of course, this is true for guessing gaming market timing, but not for valuation-based market timing.

The argument is just one of semantics, buyers and holders are you okay Do investors sometimes change their stock allocations to keep their risk profile constant when stock prices are out of control?

I don’t think that’s possible. If buys and holders recognized the importance of investors practicing price discipline through valuation-based market timing, they would pay significant attention to CAPE levels and work with investors to never allow CAPE levels to rise to current levels. This is the level you are currently at. Buy-and-hold has a long history of demonstrating indifference to valuation increases, which strongly suggests that they do not recognize the importance of valuation-based market timing.

That said, I believe it was their opposition to gaming market timing speculation that led buyers and holders to oppose market timing in the first place. Shiller’s research had not been published when Buy-and-Hold was developed. So I believe that when buy and hold initially came out against market timing, all they had in mind was a guessing game approach. Only when Shiller’s research was published in 1981 did those who followed it realize how important it is for all investors to practice valuation-based market timing (no market can remain functional if market participants do not exercise price discipline). doesn’t exist). By the time a study was published showing the reality, buys and holders had been finding fault with typical market timing for years and a defensive attitude had begun to blur the distinction between the two forms of timing.

Valuation-based market timing is not about guessing game market timing. If Shiller is correct that investor emotions are the dominant cause of stock price movements, then there is no way for investors to effectively predict when price movements will occur. How can we predict phenomena that are not controlled by rational considerations? So the guessing game market timing is over. However, it is not at all unreasonable to expect prices to adjust. soon Once they mess up violently. Setting prices appropriately is the core purpose of markets. Therefore, investors who change their stock allocations in response to large price movements can have a high level of confidence that prices will move in the expected direction at some point in the future.

So I don’t think the buy-and-hold opposition to valuation-based market timing is deep at all. If Shiller’s Nobel Prize-winning research had been published before the development of buy-and-hold strategies in the 1960s, all of our buy-and-hold friends would be practicing valuation-based market timing today. The problem is that they are generally reluctant to admit their mistakes once they have taken a public stance that market timing may not be necessary or work. The fact that the mistake was undoubtedly the worst mistake in the history of investment analysis (what could be worse than blocking the possibility of price discipline for an entire market?) made the process of acknowledging and correcting that mistake enormous. . Difficult thing.

I believe buys and holders have a serious desire to follow research-based strategies. Once we realize that opposition to valuation-based market timing is not viable in the long run (investors’ continued reluctance to practice valuation-based market timing will eventually lead to another price crash and economic collapse), it always works. and is willing to step away from long-term opposition to a form of market timing that is 100% always required of any investor who wants to keep his or her risk profile constant over time.

Rob’s bio is here.