Valuation-Informed Indexing #179
by Rob Bennett
Bull markets are a social phenomenon, not an economic one.
The first London Value Investor Conference was held in April 2012 and it has since grown to become the largest gathering of Value Investors in Europe, bringing together some of the best investors every year. At this year’s conference, held on May 19th, Simon Brewer, the former CIO of Morgan Stanley and Senior Adviser to Read More
Buy-and-Holders imagined that the reason why stock prices shoot so high is that we are enjoying amazing increases in productivity and investors are responding appropriately. We Valuation-Informed Indexers appreciate that it is just those darn humans acting up again!
The stock market is always at risk of turning bullish. The natural direction of prices is upward because stock prices are set by humans and most of us prefer large numbers at the bottom of the last page of our portfolio statements to small ones. So long as we all stick together and pretend that the gains are real, we all get what we want.
The tricky part is — How do we get the others to go along with the massive self-con?
You’re a teenager hanging out with a group of your teenager friends and one of them announces that he has obtained the fake identification needed to obtain alcohol for all of you. You feel uneasy about where things might lead.
That’s the dynamic that applies in the early days of a bull market. Lots of us know that the big price jumps are phony. But speaking up makes us look like killjoys. Everyone wants more money in his or her retirement account. No one else seems to be speaking out. What’s the harm, anyway?
There’s no great harm in the P/E10 level rising from 15 to 18. But what happens then?
You’re a teenager again. Now the fellow who drank the most is behind the wheel of a car with six teenagers in it and he’s not a good driver when sober. Now you feel twice as strongly that someone should speak up.
But why can’t it be someone else? Does it really have to be you?
We think of shame as being an emotion that comes into play when we do something wrong. But the more precise definition is that it is the emotion that keeps us from distancing ourselves too much from community expectations. When the community wants us to cut the lawn, shame reins in our urge to act selfishly. But when the community wants to persuade itself that drunk joy-rides are a good idea or that letting the P/E10 level rise to 22 is a good idea, shame reins in our urge to save young people’s lives and old people’s retirement accounts.
Bull markets get out of control because the people who understand the danger don’t possess the courage to call out those who don’t on their stupidity. The millions who want to believe that the bull market gains are real know on some level of consciousness what is going on. Every now and again they hear some killjoy whispering about his doubts, trying to work up the courage to give voice to some small thing.
This is where the Buy-and-Hold slogans come into play. Stocks are always best for the long run, didn’t you know? There’s research. You aren’t so stupid as to not know about the research that the people who sell stocks for a living mention every time they talk, are you? No killjoys welcomed here. If you don’t like to drink and drive, find another set of friends.
It’s a community thing. It’s shame. It’s those giving in to low pursuits pressuring those who otherwise might raise successful objections to keep it zipped or else.
All bull markets crash, of course. If humans were rational, crashes would cause an easing of the social pressures. In the real world, it goes the other way. Those who put us in danger know what they did and they know that doing so required them to suppress the cautionary voices. It was all in good fun before people got hurt. Now there’s more need than ever to make sure no one talks. Expecting a price crash to cause those who pushed a bull market to acknowledge their mistakes is like expecting a newspaper article pointing to government corruption to cause all those involved to come forward with confessions.
But government corruption sometimes really does get found out and the realities of bull markets sometimes really do get discussed publicly. Things just have to get really bad before that can happen. A 65 percent price drop from where we stand today should do it, according to the 140 years of historical return data available to us.
We have something working for us this time that we have never had working for us before. This time we have 32 years of peer-reviewed academic research showing how markets really work. We never need live through another bull market.
We need to get shame working for us instead of against us. The easy money of bull markets will always be a temptation to some. But those videos of teens killing themselves in car crashes really do scare some into exercising at least a little prudence. The same emotion of shame that can be used to silence those with doubts can be employed to cause one member of the group to force up enough courage to suggest paying for a taxicab. That happens.
I believe that we will see that sort of thing happening in the investing realm in years to come. The next crash is going to hurt. That hurt is going to be big enough to ring in some changes. The same shame emotion that has caused such human devastation will in years to come be serving to keep us safe from believing the mumbo jumbo we are inclined to tell ourselves about how a little bit of a bull market cannot do that much harm.
Without bull markets, there are no bear markets. Without bear markets, there are no economic crises.
The time to stop bull markets is when they are small and things have not yet reached a point where lots of people are ashamed for their friends and neighbors and co-workers to know of the role they played in building up the bull. Bull markets are not cool fun. Bull markets are positively shameful.
Rob Bennett has recorded a podcast titled Rational Investing — It’s an Attitude, Not a Program. His bio is here.