The same forces that explain the bull market also explain the suppression of discussion of Shiller’s findings.

Buy and hold is nothing new. This term is relatively new. But this idea has been around since there was a stock market in which you could invest. The core idea is to practice price indifference. That’s a dangerous idea.

Buy-and-hold investing is a get-rich-quick investment. When irrational excitement is created, investors are encouraged to do nothing about it and ignore market timing. There is no other way to curb irrational overheating than through market timing. Once buy-and-hold becomes popular, the stock market becomes a car without brakes. Everyone loves the virtual profits generated by this irrational craze, and no one feels the need to do anything to curb it. The belief that market timing is not necessary makes it impossible to overcome irrational mania in any way other than price crashes and economic crises. fallen.

I’m not a fan. I really like everything Buy-and-Hold has to say about how stock investing works, except for the argument that market timing isn’t an essential part of the story. I believe Robert Shiller’s focus on irrational passions is appropriate. I am a co-author of a study (with Wade Pfau) showing that much of the risk of investing in stocks comes from the failure of most investors to practice market timing/pricing discipline. If investors lower their stock allocations whenever prices significantly increase their risk profile, prices will never get out of control and we will no longer have to worry about bull markets, bear markets, price crashes, or economic collapse. them.

Taking Shiller’s findings seriously

I’m always trying to better understand why Shiller’s surprising findings that valuations influence long-term returns have had little effect on the stock buying habits of most investors. Shiller won the Nobel Prize in Economics. So in a sense his work had an important impact. But you wouldn’t know it by looking at today’s CAPE levels. If we had taken Shiller’s findings seriously, we would not have collectively agreed to price stocks at twice their fair value. We admire Shiller’s accomplishments and simultaneously ignore them.

why?

Ignoring price when buying stocks is a tendency deeply rooted in human nature.

I believe this is a self-destructive tendency. It is similar to the tendency to drink alcohol to excess, to become romantically involved with people you are not compatible with, or to drive a car at unsafe speeds. Humans are known to act irrationally and do things that are harmful to themselves. This is the oldest story in the book. Shiller’s insight was to see that the universal human tendency to engage in self-destructive behavior plays a large role in the stock investing story.

I’d like to see all of us do more to overcome the unfortunate tendency to sometimes overvalue stocks. On the surface, this doesn’t seem like a difficult case. If we always price our stocks appropriately, we could earn a real annual return of 6.5%. Isn’t that enough? Most of the risks that people think are associated with this asset class will disappear if we just monitor the Get Rich Quick urges better. Why don’t we just do that?

I find it difficult not to take seriously the numbers that appear on a portfolio statement. This number is the official value of a stock at a specific point in time. This is determined by millions of investors working together to price their holdings. Shiller’s research requires us to look at the official numbers and recognize that the part of the official price that reflects the effects of irrational excess – the part that pushes CAPE values ​​above the fair value level of 17 – is temporary and emotion-based. To be honest, it’s a bit of a scam. We should not make any plans based on the belief that that part is real.

But we want to! Nothing could be clearer than this.

Market timing doesn’t work

When thinking about these issues, I think it helps to have a broad perspective. Prices have never been out of control for longer than in recent decades. I’m really disappointed. However, we have made great efforts to reach a deeper understanding of these issues during that period. In some ways, the widespread adoption of the buy-and-hold concept has made the situation worse. Today’s investors believe it is moral to despise market timing/price discipline. Research shows that market timing doesn’t work. do not you know?

In my assessment, that’s only a superficial understanding of what’s going on. There is another aspect in which the popularity of Buy and Hold is a very positive sign. The research showing that market timing doesn’t work applies only to short-term timing. This means that investors are trying to guess when price movements will occur, which doesn’t really work for obvious reasons. Research shows the opposite: valuation-based market timing always works and is always very important. I believe that in time, perhaps within a few days after the next price crash, investors will realize that reality, and the idea of ​​guiding investors through peer-reviewed research will begin to pay off for all of us. It was the buyers and holders who planted the idea in our brains.

When Shiller urges us to combat irrational passions, he is urging us to do something foreign to the psyche of most stock investors since the beginning of time. That’s why it took a long time for his ideas about stock investing to spread. But the complete reality is that progress is being made every day. Over time, we are embracing the understanding that when dating, we should drink in moderation, pay attention to red flags, obey posted speed limits, and practice market timing as needed. We are gradually and very slowly arriving at a better understanding of this important topic.

Rob’s bio is here.