by Rob Bennett
I make bold claims in this column. I say that long-term stock returns are predictable. I say that the wild bull market of the late 1990s was the primary cause of the economic crisis. I say that stock prices are determined in the short term primarily by investor emotion rather than by rational responses to economic developments. I call the model of understanding stock investing being put forward Valuation-Informed Indexing and claim that it is rooted in the research of Yale Economics Professor Robert Shiller and in the arguments advanced in his book Irrational Exuberance.
Does Shiller endorse what I say? Can we be sure that the words that I put forward as rooted in his thinking in fact meet with his approval?
Shiller has said surprisingly little about how to implement his investing ideas. His focus has been on doing research and on setting forth a new theory of how stock investing works (the subtitle of his book is: “The National Bestseller That Revolutionized the Way We Think About the Stock Market.”). The idea behind this column is to put forward one person’s take on where our understanding of how stock investing works is headed presuming that Shiller’s ideas prevail in days to come. My ultimate aim is to launch a national debate in which we will hear thousands of people offering views on these topics, some of them likely being at least somewhat in line with what I suggest here and some of them likely sketching our very different perspectives on where things are headed.
I have contacted Shiller. He did not respond to my e-mail. John Walter Russell (the fellow who did the statistical work on the calculators available at my web site) once contacted Shiller with a question about the historical data presented at his web site and Shiller responded. So there is at least some reason to believe that Shiller looks at unsolicited e-mails and made a deliberate decision not to respond to mine. The natural question is — Why? Why does Shiller rarely explain how his exciting new ideas are to be put to practical implementation?
I of course cannot see into Shiller’s mind. But I can offer three possible explanations. My guess is that a combination of them supplies the full account of why Shiller has thus far largely limited himself to theoretical concerns.
One, Shiller is an academic. Academics live for theory. My guess is that the question of how his new ideas will evidence themselves in new investment strategies is not his first love. We all tend to focus our work on the things we do best and on the things we view as most important. I believe that it may be that Shiller views theory as being most important (and of course he may be right — but as a journalist I tend to put a lot more focus on the provocative strategic implications that follow from the theory).
Two, Shiller indicated in two interviews that I have read that he holds back from saying everything he believes about investing because his views are so at odds with the dominant model of today (Buy-and-Hold). He expressed a concern that he would be viewed as “unprofessional” if he were to be open about all that he believes.
I have been subjected to a great deal of abuse on the internet because of what I have said about what I see as the analytical errors in many of the studies done under the Buy-and-Hold Model. My guess is that Shiller has been subject to at least a bit of harsh criticism as well. He may have adopted a policy of being exceedingly cautious about putting forward new ideas, waiting until some of the primary ideas have gained a greater measure of acceptance before launching discussions of follow-up explorations.
A third possibility is that many of the implications of Shiller’s ideas may not have occurred to him yet. That sounds strange. But I have been exploring these ideas for close to nine years now and I have had an interesting phenomenon occur again and again over that time-period.
I have found myself perhaps a dozen times reluctant to go public with some idea passing through my mind that strikes me as being a bit too far out for public consumption. At some point, I have worked up the courage to put the idea out there and in each case I have found that talking about or writing about the initial idea has helped me to discover new paths of understanding. It is often by saying what we have come to learn but have been afraid to acknowledge we have learned that we gain the ability to learn more.
It may be that Shiller is not as far along in this process today as he might have been had he been going public with all of his ideas going back to the first day he began developing them. I certainly intend no criticism of Shiller with these words. He is the pioneer. He is the one who went to places to which no one had gone before. The point here is that it sometimes takes a fresh perspective to move to the next link on a logic chain. We all unfortunately feel a strong reluctance to explore these ideas in too much depth. It may be that even their godfather has constrained his ability to see as far ahead as he might otherwise be able to see if he felt more free to speak openly, to gain input from lots of different sources, and then to reflect again on the core ideas and their possible implications.
Please understand that nothing I say in these columns is being put forward as any sort of Shiller gospel. I believe that Shiller has revolutionized our understanding of how stock investing works. I believe that the ideas presented in the column are worthy of at least some consideration. The ideas are all inspired by Shiller’s work. I believe that Shiller would endorse some of them but not all of them. My hope is that in the not too distant future we will be seeing lots of people (including Shiller himself!) offering their takes on where Shiller’s ideas lead in terms of investing strategies.