Shiller’s Ideas Should Be Treated as Mainstream Ideas

Valuation-Informed Indexing #260

by Rob Bennett

I am not a fan of Donald Trump.

I won’t explain why. Trump’s popularity is not an investing issue.

But there is one way in which the Trump phenomenon does relate to Valuation-Informed Indexing, the subject matter of this column. Valuation-Informed Indexing is the investing strategy rooted in the “revolutionary” (Shiller’s word) findings of Yale University Economics Professor Robert Shiller. I had a Buy-and-Holder show up at my blog last week and ask me whether I am a Trump fan.


What does that have to do with Shiller’s finding that valuations affect long-term stock returns and that thus risk is a constant rather than a variable and that Buy-and-Hold is thus a dangerous long-term strategy rather than the ideal one?

The relevance is that Shiller’s investing ideas are out of the mainstream. He predicted the economic crisis of 2008 in his book because we always see an economic crisis in the wake of time-periods when Buy-and-Hold strategies become popular. When Buy-and-Holders were saying in early 2009 that stocks were cheap and that investors should be loading up on them, Shiller was saying that it would not be safe to buy stocks again until the P/E10 level dropped below 10. Shiller explains in his book that an overpriced stock market is a Ponzi scheme. He argues that high stock prices are not the product of investor rationality but of irrational exuberance and thus are built on sand. And on and on and on.

Shiller is out there. His view of how the stock market works is about as far removed from the view held by the Buy-and-Holders as it is possible to imagine.

So they dismiss him. They patronize him. They ignore him.

Take a look at the investing advice that Jack Bogle was advancing in 1980, the year prior to the publication of Shiller’s revolutionary research. It is identical in every way to the investing advice that Bogle offers today. Shiller’s research findings had zero effect on Bogle’s views. So far as Bogle and all the other Buy-and-Holders are concerned, Shiller might as well not exist. His findings are insignificant.

But how do they explain the best-selling book? How do they explain the Nobel Prize in Economics? How do they explain the fact that millions of investors find merit in Shiller’s ideas?

That’s why the fellow who posted at my blog was asking me what I think of Donald Trump. Trump is popular. He is doing well in the polls. But many people do not think that means much in Trump’s case. Many people think that Trump is a fraud or that his popularity is no indication of his merit as a Presidential candidate. The fellow at my blog was suggesting that this is the case with Shiller too, hat the type of person who would support Shiller would also support Trump because they both are against the establishment.

He has said it in other ways at earlier times. He has said that for me to believe in Shiller’s findings or in the implications of those findings is for me to believe in conspiracy theories. Buy-and-Hold is science, in the eyes of many Buy-and-Holders. Buy-and-Hold is right. Buy-and-Hold is real. Millions of investors have their lives invested in Buy-and-Hold. It must be right. It must be.

It’s not.

Not if Shiller’s reseach is valid.

Shiller’s research and the research supporting the Buy-and-Hold concept show opposite things. Both sets of research cannot be valid.

I believe that it is Shiller’s research that will prevail in the end. But that is obviously a minority opinion. Millions of good and smart people believe in Buy-and-Hold. Believing in Buy-and-Hold is certainly a respectable opinion.

I believe that believing in Valuation-Informed Indexing should be a respectable opinion as well.

There’s a fellow that I meet each year at the Financial Bloggers Conference who put it well in a blog entry he posted reporting on a speech that I gave at last year’s conference. The guy writes the “Joe Taxpayer” blog. He knows the story of how I have been banned at 20 different investing sites because I have written about the implications of Shiller’s ideas and many blog readers have responded well to my stuff (to the dismay of the bloggers promoting Buy-and-Hold strategies). Joe wrote that, given that Shiller has won a Nobel Prize, his ideas should no longer be considered so far out. He should be considered a mainstream figure and his ideas should be considered mainstream ideas.

I think that’s right.

It sounds so easy. But I have learned over the past 13 years that persuading Buy-and-Holders to treat Valuation-Informed Indexing as a mainstream strategy is a very tough business indeed. People who give investing advice don’t want their clients and readers to think that there is doubt about what they are saying. They want to be perceived as serious and well-informed and trustworthy.

Still, Shiller really did win that Nobel prize. He really is a mainstream figure, not some kook. His ideas really are mainstream ideas, not kooky ones.

My many Buy-and-Hold friends are going to need to work harder to internalize the significance of the awarding of that Nobel Prize to Shiller. It happened. It was a development of some significance. We all have to stop patronizing Shiller and begin to take his ideas much more seriously than we have taken them in the past.

Rob Bennett’s bio is here.

  • Sammy Soda

    Perhaps you need some professional help, Rob.

  • http://arichlife.passionsaving.com RobBennett

    Love is a rose but you better not pick it.
    It only grows when it’s on the vine.


  • Sammy Soda

    To just say “buy and hold” means absolutely nothing. What specifically are you buying? What is your allocation? How do you rebalance, etc.

    For you, buy and hold is just a label you give to a fake straw man.k

    Please take a course in reading comprehension before posting.

  • http://arichlife.passionsaving.com RobBennett

    I once was a Buy-and-Holder myself, Sammy. I love everything about it except one thing — Buy-and-Holders don’t consider valuations when setting their stock allocations.

    We didn’t know that it was important to do that when Buy-and-Hold was developed. We learned it in 1981. We should have moved forward then. But we didn’t. And the longer we delay doing so, the harder it is to acknowledge the mistake. Every day of delay makes it harder.

    None of this has anything to do with specific portfolios. If the person using Portfolio A considers valuations when setting his stock allocation, he is going to do well in the long term. If he fails to do so, he is going to do poorly. It’s the same with the person using Portfolio B and with the person using Portfolio C.

    What portfolio you use is a small thing. Whether you consider valuations or not is a big thing. It’s 80 percent of the stock investing story. So it’s not optional. You MUST do that.

    I am anti-Buy-and-Hold only in the sense that I oppose not acknowledging the mistake and changing Buy-and-Hold so that it can work in the real world. I am the biggest fan in the world of all the stuff that the Buy-and-Holders got right, which helped us all in a big way. My criticism is that I want to see the Buy-and-Holders acknowledge the mistake they made so that all the good stuff they did can produce good fruit.

    At the very least I would like to see the Buy-and-Holders permit and encourage a national debate on these questions. I am 100 percent confident that every Buy-and-Holder will in time become a Valuation-Informed Indexer once we have the debate. But we obviously cannot move forward without first having the national debate. It is through the national debate that we all learn what’s up and why we need to make a change.

    That’s where I am coming from, in any event. I believe that we need to take valuations into consideration when we set our stock allocations. That’s it.

    It may seem at first like a small change. But it’s not. The implications of that one change in how we go about investing in stocks reaches in hundreds of exiting directions. It is a change of fundamental importance. Shiller’s finding of 1981 was truly “revolutionary.”

    Thanks for caring about these issues.


  • Sammy Soda

    Your Buy and Hold mantra is just a theatrical prop for your little tales of fantasy. Try speaking of specific portfolios (three fund, coffeehouse, etc). You use it as just one big label as part of your made up little world of battle pitting the “Big old scary buy and hold monster” against the little hero of the day “VII”.

  • http://arichlife.passionsaving.com RobBennett

    Buy-and-Hold is Science.


  • Sammy Soda

    It really isn’t hard to figure out Rob. I read what people say. I don’t make up what I think I want them to say. Just show me one factual link from a 3rd party source that says that any of what I say is wrong. Give it a try, Rob.

  • http://arichlife.passionsaving.com RobBennett

    You have it all figured out, Sammy.


  • Sammy Soda

    Like I just said on the other thread, I am not buying and you are selling. You have been told time and again by many. As to the hocomania comment, this is what your readers say. Just Google it.

  • http://arichlife.passionsaving.com RobBennett

    I’m afraid that I’m not buying what you’re selling, Sammy.


  • Sammy Soda

    No, you make long winded comments thinking that it outweighs the comments by other people. Instead, you often end up with rambling diatribes that wander all over the place. Others have described this as “hocomania”.

  • http://arichlife.passionsaving.com RobBennett

    We’ve been having these discussions at lots of different places for a long time Sammy. I often agree with parts of what you say. There have been times when you have made points that I thought were so important that I wrote articles about them or recorded podcasts discussing them. I am in your debt for the insights that you have passed along to me.

    I dont agree about the “long-winded comments” thing. Lots of people don’t understand the implications of Shiller’s findings. There is a lot of confusion out there. People like you make it worse with all of the tone and attitude you incorporate into your comments. So it helps for me to work through the logic chain step by step.

    That’s my sincere take, in any event.

    My best and warmest wishes to you.


  • Sammy Soda

    You basically just agreed with what I said, Rob.

    Making long winded comments is not necessary. It just shows you have a weak hand and are trying to compensate.

  • http://arichlife.passionsaving.com RobBennett

    Shiller is not being entirely truthful.

    All of Shiller’s work shows that investors must always, always, always practice price discipline (long-term timing). What do you think it means to say that valuations affect long-term returns? It means that stocks are more risky when priced high. When stocks become more risky, investors need to lower their stock allocations to maintain the same risk profile. No?

    Shiller and lots of others hold back from stating clearly what the last 34 years of peer-reviewed research shows because it is very painful to Buy-and-Holders for them to hear that a big portion of the money that they are counting on to live on in retirement is not real.

    I think it is better to tell people. I think that all the people who have been mislead re these matters are going to be very upset following the next price crash.

    I also believe that at that time Shiller and lots of others are going to start stating things in a much more frank way. I believe that Shiller will be publishing a book following the next crash in which he spells out all the practical steps that investors need to take to protect themselves in overvalued markets that he held back from including in Irrational Exuberance. I also believe that Shiller will be telling us a lot more about the intimidation tactics that caused him to hold back on telling us all he knows all these years.

    The shift from Buy-and-Hold to Valuation-Informed Indexing is a process. It is taking longer than most of us would like to see it take because it is such a huge change. It means re-writing all the textbooks and re-doing all the calculators and on and on and on. All of the changes are positive. This is a huge advance. But it takes times for a society to come to accept the need to make the advance. Thousands of careers were built around the Buy-and-Hold concept and so there are lots of powerful and wealthy people who would prefer that investors not learn about the implications of Shiller’s “revolutionary” (his word) research.

    My best wishes to you, Sammy.


  • Sammy Soda

    Shilled has said that we should not use CAPE to time the market…..PERIOD. beyond that, you are just making it up and/ or saying that Shiller is not being truthful. End of story.

  • http://arichlife.passionsaving.com RobBennett

    Part of what you say is accurate and part is not, Sammy.

    Shiller has never said that he does not believe that long-term timing (price discipline) is required. He has said that he practices long-term timing himself and he has recommended that others practice it. His life’s work makes the case for long-term timing in a compelling way. Shiller of course opposes short-term timing because all of the peer-reviewed research shows that it does not work. It is a common tactic for Buy-and-Holders to try to confuse people about the critical distinction between the two types of timing.

    Shiller is afraid to speak bluntly about the many important implications of his “revolutionary” (his word) finding that long-term timing (price discipline) is always required for those hoping to have any hope of long-term investing success. There is an easy way to test this. When Shiller and Fama were both awarded the Nobel prize, all of the articles reporting this noted how odd it was that two people who opposite ideas about how the market works were both awarded the highest honor in the field. Given that Shiller’s research shows the opposite of what the Buy-and-Holders believe is so, he should have written extensively about what follows re stock allocation practices from his beliefs. Yet this issue is not discussed AT ALL in his book. Huh?

    We are all social creatures. We all respond to Social Taboos and social pressures. Shiller is in good company re this point. I was afraid to write about the implications of Shiller’s work for many years myself. If we are going to recover from the Buy-and-Hold Crisis, we all need to work up the courage to address these questions openly and frankly and seriously.

    That’s my sincere take re this terribly important matter, in any event, Sammy. Thanks for your interest in the issues.


  • http://www.passionsaving.com robbennett

    Half of what you say is accurate and half isn’t, Sammy.

    Shiller have NEVER said that long-term timing (price discipline) does not work. He has never even suggested such a thing. All of his life’s work shows that long-term timing ALWAYS works and is ALWAYS 100 percent required for those hoping to have a realistic hope of long-term investing success. Shiller has certainly said many times that short-term timing never works and all of the peer-reviewed research supports him on this point. It is a common tactic of Buy-and-Holders to try to confuse people re the critical distinction between short-term timing (which never works) and long-term timing (which always works).

    Shiller is heavily influenced by the social pressure he feels from people who follow Buy-and-Hold strategies and who feel great pain that they are following a strategy discredited by 34 years of peer-reviewed research. There is an easy way to test whether this is so. When Shiller and Fama were both awarded the Nobel prize, virtually every article that reported this commented how Shiller’s theory re how the market works is the opposite of Fama’s theory (Buy-and-Hold). Given that the two theories are opposites, Shiller should have devoted several chapters of his book to exploration of how his research supports very different stock allocation strategies. You will search in vain for a discussion of that question in Shiller’s book.


    Because Shiller is afraid to tell people who have invested their entire lives in Buy-and-Hold that they are wrong.

    He is in good company. We are all afraid to address these questions head on. I was afraid to do so myself for many years. So I know how Shiller feels.

    But we must as a society work up the courage to address these questions frankly. That’s how we recover from this economic crisis.

    Thanks much for your interest in these ideas, Sammy.


  • Sammy Soda

    Shiller himself has said that his data is not meant to be used for market timing. Further, Shiller has also indicated that he is still invested in the market, devote your calls for a disasterous crash. You seem to twist Shillers words around and when confronted, you say that Shiller is lying due to pressure by so called “goons”.