The stock market is uniquely structured to encourage self-deception.

Stock investment is a grain business.

no! no! this is Serious business. Why did I say so differently?

Because we don’t take it as a completely serious business. We do a lot of self-deception when buying stocks. I think we should try to overcome that tendency.

Robert Shiller has published research showing that valuations influence long-term returns, and has published a book exploring the dangers of creating too much irrational energy. We blew him away. We continued to buy shares in the same buy-and-hold fashion as before and raised the CAPE value to 32. We are not serious people.

why? We have to do that. We are all interested in funding a secure retirement.

Stocks encourage self-deception

The problem is the nature of the asset class. Stocks are uniquely structured to encourage self-deception.

There is no other asset class whose owners determine the value of that asset. The same is true of housing to some extent. Homeowners collectively decide how much their home is worth. But people don’t buy and sell homes on a regular basis. Although people are surprised to hear that house prices have risen, they do not think of it as information that can help them make money anytime in the near future. People think of a rise in stock prices as a current profit. When they hear that their portfolio is valued at a higher price, they concretely and immediately think that they are richer than before.

It is risky for the owner of an asset class to have the power to assign value to that asset. The owner has obvious bias. People who own stocks want their prices to be higher. So they put a lot of mental energy into projects that raise prices. All kinds of rationalizations are possible in the human mind engaged in this work.

Market timing. That’s the only possibility. Inappropriate price increases always fade away over time. People who buy stocks may remind themselves that stocks do not perform as well when purchased at higher prices, and therefore may opt for a smaller stock allocation in such cases. Then, when you need to lower your prices, your prices will be lower. In a world where information about how excessive price increases affect a stock’s value proposition can be shared freely, stock prices are self-regulating.

But rationalization once again came to the rescue. What if most of us believed that market timing wasn’t really necessary and that there could be something bad, strange, and unwise about it? In such a scenario, irrational passion will always win. We all want our stock prices to go higher, and we’ll engage in all sorts of creative rationalizations to make our dreams come true.

risky investment class

Stocks are a great investment class. However, they are a risky investment class. It’s a lot to ask human stock investors not to bid prices to very high levels. And when they collapse, trillions of dollars of consumer spending power are quickly destroyed. This will soon lead to economic collapse. Has there ever been a strong bull market that wasn’t followed by a grim recession? That’s a rhetorical question.

I believe investment advice should be centered around helping people avoid the key risks of stock investing. It’s the type of investment that lures us into a massive act of self-deception. What if experts focused our attention on CAPE values ​​every day? What if they told us how much wealth would be destroyed if stock prices returned to fair value levels, as they did earlier in history? What if they translated those numbers into a picture of human misery, telling us how many millions of lost retirees we’re going to see, and how likely it is that so many people will be devastated and thrown out of work in an economic collapse? property?

I propose a revolutionary change in the way we all talk about stock investing. No more talking nonsense that creates irrational passion and acts as if taking advantage is something to celebrate. The desire to keep stock prices as close to fair value as possible, with an emphasis on keeping stock prices at their actual prices.

I am a dreamer. Or maybe he’s just a jerk. Anyway, one of them is for sure.

Rob’s bio is here.