Stock investment is a community effort

Investing in stocks is a solitary endeavor. The purpose is to fund your personal retirement. It’s your job to save enough money to live a safe and happy life. And it’s your job to decide your stock allocation. And it cuts out all the nonsense that is aimed at stock investors and focuses on short-term considerations rather than long-term important issues. And you have to stick with the plan long enough for the strategic thinking behind it to pay off.

That’s how most people think about things.

Long-term stock investment success

To some extent, this is all true. But I believe that the great undiscovered continent of the world of stock investing is valuation. Stocks are a very good investment choice when priced appropriately. It’s an amazing investment choice when the price is low. Not a very good investment choice when prices are at scary levels. In my opinion, paying attention to valuation is 70% of what is needed to achieve long-term stock investing success. It is difficult to recognize the importance of valuation and how it can underperform in the long run. If you don’t recognize the importance of valuation, you are likely to suffer huge losses at some point during your investing life.

No one investor can have much influence on stock valuation. It’s a community thing. Determining stock prices is a collective undertaking. If you want to buy stocks at reasonable prices, you should do your best to educate others about the benefits of keeping prices at reasonable levels and the dangers of letting prices rise to a certain level. Where they reside today.

Of course, an individual may choose to have a higher stock allocation when prices are good than when they are bad. This will provide significant protection from the negative effects of a price crash and will eliminate the need to convince buyers and holders of the foolishness of their methods. This is an easy thing to do and one that can pay off big over a lifetime of investment. I sincerely encourage you to put in some effort so that you can invest in stocks with significantly reduced risk while still enjoying the realistic prospect of earning greatly improved returns. Why not? That place is investor paradise.

but… .

It still matters what other people are doing.

Stocks have been overvalued for a long time. In 1996, prices were so high that Shiller published a paper warning investors that if they failed to lower their stock allocations, they would regret that choice within a decade. Prices fell significantly at the end of 2008. However, it rose again to high levels in late 2009 and has remained at various “high” levels ever since. If you’re one of those crazy people who lower their stock allocation by 30% when prices rise to dangerously high levels, you’ve been using a less-than-ideal stock allocation for a long time.

Maybe it will pay off in the end. You will lose less during the next price crash. And over time, you can invest your savings in stocks when they are selling at price levels that can yield mouth-watering profits. A study of the historical record shows that this strategy has always paid off in the long run. So perhaps it’s not that big of a deal that we’ve been using a rather low stock allocation for a number of years.

But that’s not a good thing. You don’t have to wait too long to realize these benefits. It would be better to be able to get normal returns through normal stock allocation. I believe stocks will continue to perform as well in the future as they have in the past. So I’m a firm believer in valuation-based market timing. However, I strongly believe that a world in which market timing would not be necessary would be a better world because valuations would never grow out of control.

Keep stock prices straight and narrow

They say no person is an island. We live in a community. I believe stocks should be priced at fair value. Do you know what it means for the stock price to return to its current level? This would mean a loss of consumer purchasing power large enough to cause a recession. That would mean an ocean of human misery. I hate that idea. I want to see both stock prices go down, and I don’t want to see them go down at the same time. I don’t see how anyone could actually want to go back to a reasonable price level. The intellectual appeal of the idea is powerful. But the human impact will be enormous. No one wants hurricane season to come.

I’d like to see all of us educated enough about how the stock market works so that we never again have to worry about bull markets, bear markets, price crashes, and subsequent economic collapse. In my assessment, bull market prices are a hurricane warning. I don’t celebrate big stock gains. I shudder when I hear the nonsense that is so common during a time when prices are rising by more than 6.5% per year. In my book, I say bull markets are the root cause of everything bad in the stock market. I vote “no”. You know?

It’s not just for myself. I can avoid the pitfalls of a bull market in a personal way by lowering my stock allocation slightly. But I see the stock market as somewhat similar to the water supply or oxygen supply. This is something we all need to be able to effectively provide for our financial future. We shouldn’t want it to be polluted. We must do what we can to help others understand why keeping stock prices on the straight and narrow is a project to which we must all contribute energetically and cheerfully.

Rob’s bio is here.