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.
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.