By Rob Bennett
Yale Economics Professor Robert Shiller published his book Irrational Exuberance in March 2000. That’s the month that the tech bubble popped. It’s a rare write-up of Shiller that fails to credit him with having anticipated the popping of this bubble.
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He’s a great man. His book is in my assessment the most important ever published in the field of investing. But Shiller did not anticipate the tech bubble pop. People need to stop saying this.
It is of course a fact that Shiller described the tech bubble in his book. And it is of course a fact that he made clear that this bubble would someday pop. And it is of course a fact that the bubble did indeed pop within days of the date his book was published.
That was coincidence. Shiller had no way of knowing that the bubble was going to pop that month or even that year. Shiller didn’t try to anticipate the tech bubble pop. So he shouldn’t be given credit for having done so.
The people who give him credit for this are doing so with the best of intentions. They are impressed that he was able to say something significant about stock investing and be proven right in what he said. Still, the reality is that they are impressed about the wrong thing.
Lots and lots of people try to guess when stock prices will swing wildly upward or downward. It’s a kind of parlor trick played by investing analysts. Shiller’s genius is that he appreciates the silliness of playing the game. He doesn’t advance guesses as to when price swings will come because he knows that it is a vain exercise to do so. Shiller puts his mental energies to more important tasks. Crediting him with having performed a silly parlor trick takes attention away from his real accomplishments.
What Shiller really did was to anticipate the economic crisis of September 2008.
Here is what he says on Page 212:
“Individuals, foundations, college endowments and other beneficiaries of the market are going to find themselves poorer, in the aggregate by trillions of dollars. The real losses could be comparable to the total destruction of all the schools in the country, or all the farms in the country, or possibly even all the homes in the country.”
Shiller anticipated the second biggest economic crisis in U.S. history, a crisis that has already established itself as the most important political development of the first decade of the 21st Century. He did this more than eight years before it took place. He spoke publicly about why the crisis was coming at a time when policymakers could have headed it off. That’s a truly impressive accomplishment, far more impressive than just happening to publish a book about stock bubbles in the month that one of the bubbles happened to burst.
Why do we focus on the trivial accomplishment while generally ignoring the far more substantial one? There are two reasons.
One, we cannot help thinking how cool it would be if short-term timing worked. The publication of Shiller’s book in the month that the tech bubble popped would truly be impressive if the good timing of its publication had been intentional. It wasn’t. But it would make such a good story if it had been that we are drawn to pretending that there was intent there, that Shiller was doing something magical that he of course in no way, shape or form claimed to have done.
Two, we are reluctant to deal with the implications of Shiller’s far more important accomplishment. Shiller predicted the economic crisis and we failed to heed his words. We foolishly let the severe consequences of which he warned us take place by failing to act in response to the warning. We would rather applaud parlor tricks than come to terms with how we need to change what we believe about stock investing so that we never again bring on an economic crisis with our irresponsible desire to stick with the same stock allocation at all times.
Shiller doesn’t do parlor tricks. His book conveys a message of great public policy significance. We need to go back and read it again, this time with more openness to its most important insights. Shiller’s words show us the path to better economic times. We need to acknowledge that, let in the message, roll up our sleeves, and get to work.
No one knows what is going to happen to stock prices over the next week, the next month or the next year. Anyone who cares to can come to possess a good sense of where stock prices are headed over the next 10 years or so. That’s Shiller’s big insight. It’s one that we all should be exploring as we get about the business of putting our broken economic and political systems back together again.
Rob Bennett developed an investment return calculator that runs a regression analysis of the historical stock-return date to identify the most likely 10-year return for stocks. His bio is here.