By Rob Bennett
Columbia University Professor Rahiv Sethi once said something about me that I believe perfectly sums up the work I have done in the investing field over the past eight years. He said: “Rob Bennett makes the claim that market timing based on aggregate P/E ratios can be a far more effective strategy than passive investing over long horizons (ten years or more). I am not in a position to evaluate this claim empirically but it is consistent with Shiller’s analysis and I can see how it could be true.”
Sethi is not endorsing my work. So I think it would be fair to say that he is not evidencing a bias in my favor with these words. And if he is not speaking from bias, he is putting forward a message of considerable import.
Sethi is saying that market timing may work.
He is not saying that he believes this himself. He is not saying that he has done the research needed to prove this. But he is saying that such a finding follows from Shiller’s work. And he is saying that “it could be true.” The “it” is market timing. Market timing could work.
My question is: Why aren’t we all on the case? If such well-regarded figures as Rahiv Sethie believe that market timing could work, why aren’t we all engaged in an effort to learn for sure whether it does or not? Sethie has not done the empirical work needed for him to say for sure. Are there academics doing that research today? How is the work proceeding? Are there newspapers following progress on their work and keeping us all up to date?
We follow developments in the fields of politics and football and television celebrities on a minute-by-minute basis. Learning that market timing works would mean that we could all invest in stocks far more effectively than we ever have before. This one is more important than the results of a football game or a sitcom or even an election. There must be reporters tracking down the latest developments, no?
We all know that that sort of thing is not going on. Most of us would prefer not to know that market timing works, no matter how much it would help us financially to learn that it did. That’s strange. Why is this so?
There are two big factors.
One is that learning that market timing works would stand the conventional investing wisdom on its head. If there is one message that has been drilled into investors’ heads repeatedly over the past three decades, it is the message that timing never works, timing never works, timing never works. It would be disconcerting to learn otherwise. Humans don’t like surprises. We resist such knowledge.
Two is that the experts in this field have directed huge amounts of human energy to the development of books and calculators and studies and so forth rooted in a belief that timing doesn’t work. If it turns out that timing does work afterall, all of that work is discredited and needs to be redone. The end result is a huge advance in our understanding of how stock investing works. But it’s not hard to see why there would be a great amount of institutional foot-dragging re the task of proving the case.
Shiller’s book Irrational Exuberance was well-received. But the ideas advanced in it have not been well-explored. It would be closer to the truth to say that they have been ignored. Lots of big-name publications offered effusive praise for the book subtitled “The National Bestseller That Revolutionized the Way We Think About the Stock Market” and then went right back to promoting the same Buy-and-Hold investing strategies that they had been promoting for several decades when it was published.
Shiller really did revolutionize our understanding. He showed that valuations affect long-term returns. That’s the same thing as showing that long-term timing (but not short-term timing) works. That’s the same thing as showing that Buy-and-Hold is not even a little bit of a good idea.
We made a mistake ignoring Shiller for so long. The mistake got worse with the onset of the economic crisis in 2008. And it gets even worse still with each week that passes without a national debate being initiated on these questions.
If Shiller is right and Bogle is wrong, there are millions of people who will be suffering failed retirements in days to come as a result of our unwillingness as a society to come to terms with these questions. If Shiller is right and Bogle is wrong, the economic crisis is something we all created by failing to lower our stock allocations when prices reached insanely dangerous levels. If Shiller is right and Bogle is wrong, the damage that has been inflicted on the stability of our political system in recent years (not great yet, but signs are becoming gradually more ominous over time) was something that could have been avoided had we responded to what the academic research has been telling us for 30 years now in a more responsible manner.
I’m no investing expert. I’m a journalist. I write about this stuff because I know a story when I see one. Shiller’s finding that long-term market timing works is the biggest story in the personal finance field in my lifetime. It is impossible to overestimate how big a story this will turn out to be once all the implications are examined.
There is a good bit of evidence on the table today that market timing works. We cannot say this with 100 percent certainty today. Not enough smart people have looked at the question in a serious and in-depth way to justify such confidence in Shiller’s finding. But it could be true. That’s big. That’s a very, very, very big development by itself.
We need to initiate a national debate on the realities of stock investing as they have been revealed to us both by the research that led to development of the Buy-and-Hold Model in the 1970s and to the Valuation-Informed Indexing Model in more recent years. We need to do that soon.
Putting it off helps absolutely no one.