Shiller’s Comments About the Recent Price Drop Are Disingenuous


Valuation-Informed Indexing #263

by Rob Bennett

I rank Robert Shiller as the most important investing analyst of all time. So, when the thought of giving this column entry the headline that you see above popped into my head, I hesitated. I looked up the word to see precisely what it signifies to say that something is “disingenuous.” The answer that came back is: “not candid or sincere, typically by pretending that one knows less about something than one really does.” I concluded that the term fits.

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I don’t believe that Shiller is being entirely disingenuous. His 1981 finding that valuations affect long-term returns “revolutionized” (Shiller’s word) our understanding of how stock investing works. We need a national debate on the implications of Shiller’s findings before any of us will be able to fully appreciate the implications of the new model. We are all suffering cognitive dissonance. That includes Bogle. That includes Shiller. That includes me.

So I hope that my claim that Shiller is being disingenuous will not be perceived as excessively harsh. Still, I think the claim needs to be advanced. People look to Shiller as the #1 expert on Valuation-Informed Indexing. When he says things that don’t entirely add up, he does harm to the efforts of all of us who want to see Valuation-Informed Indexing become dominant over Buy-and-Hold.

Shiller said in a recent article titled Rising Anxiety that Stocks Are Overpriced that: “The average Cyclically Adjusted Price/Earnings Ratio [P/E10) between 1881 and 2015 in the United States is 17; in July, it reached 27. Levels higher than that have occurred very few times, including the years surrounding the stock market peaks of 1929, 2000 and 2007. In all three of these instances, the stock market eventually collapsed….In two other episodes, CAPE was very high — following sharp increases in the preceding couple of years — when the Standard & Poor’s 500-stock index fell 10 percent in just five days. One was in April 2000, when CAPE stood at 44, and that was followed by a huge crash that eventually took the S.&P 500 further down by an additional 43 percent by 2003. The other was in August 1998. At that point, CAPE was around 35. This was during the Russian debt crisis, and the market roared back while President Bill Clinton was in Moscow dealing with the crisis….It is entirely plausible that the shaking of investor complacency in recent days will, despite intermittent rebounds, take the market down significantly and within a year or two restore CAPE ratios to historical averages….Or maybe this could be another 1998. We have no statistical proof. We are in a rare and anxious ‘just don’t know’ situation, where the stock market is inherently risky because of unstable investor psychology.”

Most of what Shiller says here is both true and important. Yes, stocks are insanely overpriced. Yes, that makes stocks a dangerous investment class. Yes, we do not know whether stock prices will crash soon or not. The research-based support for these claims is overwhelming.

What bugs me is not so much the content of what Shiller is saying as the manner in which he is saying it. Most investors don’t care about theory; they want to know what to do with their money. What is Shiller telling us to do? Is he saying that we should lower our stock allocations because prices are insanely high? Or is he saying that we do not need to lower our stock allocations because short-term predictions don’t work?

He is saying both of these things. And that message is a highly confusing one for most investors.

Look at the last sentence of the material that I quoted from Shiller’s article. He says: “We are in a rare and anxious ‘just don’t know’ situation, where the stock market is inherently risky because of unstable investor psychology.” Huh? What does that mean? The stock market is “risky.” But we are also in a “just don’t know” situation. Can both things possibly be true at the same time?

If the stock market is more risky than usual, investors should be lowering their stock allocations. We all want to keep our risk profiles roughly constant. So, when the market gets more risky, we need to go with lower stock allocations. Does that not follow?

So why does Shiller say that we are in a “just don’t know” situation? We do know. We know that stocks are riskier than usual. We know that we need to lower our stock allocations. We know what we need to know.

We don’t know precisely when the crash is going to arrive. Shiller is right about that and he is right to point that out. If he failed to point that out and then stocks did not crash soon, people would say that his prediction “failed.” We can only predict the long-term and so it is important to tell people that P/E10 cannot be used to make short-term predictions. But it is not at all true that we are in a “just don’t know” situation. Risk is high. So we know that investors should be lowering their stock allocations.

This manner of speaking about the power of P/E10 to predict long-term returns is common. It hurts the cause. Investors hear that we cannot predict the short-term and pick up on suggestions that we don’t know what we need to know and conclude that it is okay to fail to stick with their high stock allocations a bit longer. Remember, most investors want to believe that the numbers that they see on their portfolio statements at times of high valuations are real. Shiller is saying things in a manner that permits investors who want to continue to believe in bull-market fantasies to do so. That’s unfortunate.

We know what we need to know. We know that stocks are more risky today than they would be if prices were more reasonable and that we need to lower our stocks allocations as a consequence. That’s how I would say it. I would make an effort to state the message in a manner that did not permit investors going with high stock allocations today to miss what was being said about what they need to do in response to today’s dangerous stock prices.

Rob Bennett’s bio is here.

Updated on

Rob Bennett’s A Rich Life blog aims to put the “personal” back into “personal finance” - he focuses on the role played by emotion in saving and investing decisions. Rob developed the Passion Saving approach to money management; Passion Savers save not to finance their old-age retirements but to enjoy more freedom and opportunity in their 20s, 30s, 40s, and 50s - because they pursue saving goals over which they feel a more intense personal concern, they are more motivated to save effectively. He also developed the Valuation-Informed Indexing investing strategy, a strategy that combines the most powerful insights of Vanguard Founder John Bogle and Yale Professsor Robert Shiller in a simple approach offering higher returns at greatly diminished risk. Tom Gardner, co-founder of the Motley Fool web site, said of Rob’s work: “The elegant simplicty of his ideas warms the heart and startles the brain.”
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  1. “You’re not making an effort, Sammy.”

    No, Rob. You are not making an effort. You don’t back up anything with any facts or support. You just make long winded responses that are full of your catch phrases and fantasies.

    By the way, you do know that CAPE only refers to the S&P 500 and is NOT the entire market.

    As for Wade (mentioned above), I find it ironic as to how you describe his “betrayal ” on your website today. He is the one that has told you to stop talking about him, explaining that you have caused him great jarm. He is the one that you have sent out over 30,000 emails to people about him. He is the one that has told you that you are wrong on SWR’s. He is the one that actually authored the paper that you continually lie about in claiming that you are an author.

    I don’t think Wade would have any further interest in dealing with someone like you.

  2. You’re not making an effort, Sammy.

    No one said that the entire market is overvalued by 65 percent. That is the size of the price drop we should expect given that prices always fall to one-half fair value by the end of a secular bear market.

    We don’t know specifically which stocks are overvalued and by how much. We know that the market as a whole is overvalued. We need to get that word out to every investor. We need to explain to them that, to act in their self-interest, they need to lower their stock allocations to reflect the level of overvaluation present in the market today. That’s it. When we do that, everything else takes care of itself. That was the mistake that the Buy-and-Holders made 50 years ago that was uncovered by the peer-reviewed research 34 years ago and that has been covered up for 34 years now.

    Wade LOVES Valuation-Informed Indexing, Sammy. He loves, loves, loves it. He told me that over and over again during the 16 months when we were working together. He was amazed and stunned by how much of an advance Valuation-Informed Indexing is over Buy-and-Hold. He had realistic visions of a Nobel Prize in his head when he laid awake at night thinking about how huge an advance this was and how proud he was to be part of it.

    Today he does not feel comfortable talking about what he learned during those 16 years of research. But once as a society we all come clean about all this Wade is not going to be even a tiny bit shy about any of t. He will be shouting from the rooftops about all of the hundreds of powerful insights he developed during the 16 months he spent helping to advance the investing model of the future. And so will all my other Buy-and-Hold friends. Bogle will be helping develop the VII concept in those days. And Bernstein will be helping develop the VII concept. And Swedroe will be helping develop the VII concept. And on and on and on and on and on.

    That’s the place where we all want to be, Sammy. We can’t get there by magic. There’s only one way to get there. We get there by opening the entire internet to honest discussion of safe withdrawal rates and every other investing topic imaginable. There’s no downside. It’s all upside. Everyone benefits. No one gets hurt in any way. The only hold-up that we have ever experienced is that the Buy-and-Holders have to say the words “I” and “Was” and “Wrong” to get us there. They made a (perfectly understandable) mistake and they have to acknowledge it for people to feel comfortable telling us all the stuff that we very, very much need to know.

    That’s the entire deal. As a society we made a huge advance in 1981. We haven’t been able to reap the benefits for 34 years because those benefits are so huge that seeing them go public hurts the feelings of those who came up with the earlier model. But the Buy-and-Holders are going to be every bit as excited as all the rest of us when we make the inevitable leap forward. They are going to be a big part of all the fun. They love their country just like all the rest of us. They will be thrilled to be contributing scores of new insights. And they will be thrilled to see the many powerful insights that they contributed in earlier times now producing good fruit in the real world.

    That’s certainly how I expect to see things go. I only wish that it wouldn’t take another price crash and all the human misery that goes with that to get us there.

    Hang in there, Sammy. It gets better. A LOT better.


  3. No Rob, you have not answered it. Are you talking about small cap, large cap, mid cap, S&P 500, the Wilshire, European stock, emerging market stock, the Vanguard total international stock index fund, energy stocks, healthcare stocks? Which stocks SPECIFICALLY are 65% overvalued in YOUR mind?

    You don’t know jack about what the research says based on what you have posted. Wade Pfau tried to reason with you, but you only heard what you wanted to hear. It is no wonder why your investment strategy has gone down in flames

  4. You’ve asked this question before, Sammy, and I’ve answered it before.

    There’s only one thing wrong with Buy-and-Hold. Every aspect of the Buy-and-Hold Model other than this one thing is a work of a beauty, in my assessment. The one thing that the Buy-and-Holders got wrong is that investors must always, always, always engage in price discipline (long-term timing). That’s 80 percent of the stock investing experience. If you get that one right, you can’t go wrong in the long term. If you get that one wrong, you can’t go right in the long term.

    There are lots of different Buy-and-Hold portfolio. Different investors have different amount of money. Different investors have different life goals. Different investors have different risk tolerances. So there is no one stock allocation that applies for all. But EVERY investor must adjust his stock allocation in response to big valuation shifts if he wants to keep his risk profile roughly constant.

    If your stock allocation at times of fair-value prices is 50 percent, you want to change that when prices are insanely high.

    If you stock allocation at times of fair-value prices is 80 percent, you want to change that when prices are insanely high.

    If you stock allocation at times of fair-value prices is 20 percent, you want to change that when prices are insanely high.

    The key is that you always, always, always make changes in response to big valuation shifts. Another way of saying it is that you never, never, never follow a Buy-and-Hold strategy.

    Buy-and-Hold is a marketing gimmick. It is the OPPOSITE of what the last 34 years of peer-reviewed research says to do.

    If the market were efficient (as some believed it to be prior to 1981), Buy-and-Hold would be the ideal strategy. Shiller showed that the market is NOT efficient, that valuations affect long-term returns. Stock investing risk is not a constant but a variable.

    This is the most important insight ever developed in the history of investing research. It changes everything. We all need to be spreading the word. We all need to work together to launch a national debate re the implications of Shiller’s “revolutionary” (his word) research. Buy-and-Hold is the past. Valuation-Informed Indexing is the future.

    Or so Rob Bennett sincerely believes, in any event.

    I hope that helps a bit.


  5. Again, buy and hold what? You and Aaron might as well be talking about green cheese because all I see is a bunch of talk and no facts based on a specific portfolio. As for what many of us call buy, hold and rebalance, there are several strategies under that umbrella that are well documented with long track records. Unlike your “Lucky VII” strategy, people have actually used these strategies themselves with long term actual results.

  6. Aaron:

    I don’t want to try to entice you into a discussion that you do not think will prove fruitful. But I cannot resist putting forward some words here. I have spent the last 13 years of my life examining this question of why people have not moved from Buy-and-Hold to Valuation-Informed Indexing (the model for understanding how stock investing works that is rooted in Shiller’s 1981 finding that valuations affect long-term returns). So I obviously see this as a question of huge significance.

    The P/E10 level in 1982 was 8. In 2000, it was 44. That’s a difference of nearly 600 percent. It follows that a 1982 retiree could afford to take out from his portfolio each year SIX TIMES what the 2000 retiree could afford to take out from his portfolio. If you run a regression analysis on the 145 years of historical data available to us, that’s the result you get. The safe-withdrawal-rate in 2000 was 1.6, meaning that a retiree with a $1 million portfolio could safely take out $16,000 to live on each year. The SWR in 1982 was 9 percent. That retirees could take out $90,000 per year. A pretty big difference!

    Shiller’s finding changes the analysis of every strategic question imaginable. It makes zero sense for an investor to go with the same stock allocation when the SWR is 1.6 percent as he goes with when the SWR is 9.0. Stocks are far more risky when the SWR is 1.6 percent. All investors should want to keep their risk profiles roughly constant. It’s not possible to keep your risk profile roughly constant if you are not willing to adjust your stock allocation in response to big valuation shifts.

    Why does’t everybody know this?

    As you say, there are lots of reasons. But one big reason is that the Valuation-Informed Indexers don’t talk about it much. We should be pushing these amazing new ideas but we do not. Shiller’s book is the best book ever written on investing. But I challenge you to say what Shiller recommends that investors do differently as a result of his research findings. Nowhere in that book does Shiller address the practical question of WHAT INVESTORS SHOULD DO DIFFERENTLY as a result of his findings!

    Isn’t that odd?

    I know why Shiller (and lots and lots of others) shies away from addressing the practical questions. I have spent the last 13 years of my life trying to learn what investors should do differently and then to share with them what I have learned. As a result, I have become the most hated poster on the internet. It’s not that Shiller’s findings have any bad aspects to them. Shiller’s stuff is good stuff piled on top of good stuff piled on top of good stuff. The reason why people cannot stand to learn what he showed us is that his stuff is such a huge advance over Buy-and-Hold that we cannot bear to acknowledge the mistake we made as a society when we elected to spend hundreds of millions of dollars promoting Buy-and-Hold strategies.

    We have seen huge advances in the computer technology field over the past 34 years. I would argue that we have seen BIGGER advances in the investing analysis field. The problem is that we have not reaped the benefits of those intellectual advances. We keep quiet about them because we sense that it would hurt the feelings of the Buy-and-Holders to talk about the advances in a clear way.

    That drives me crazy! I want to take advantage of the advances. I want to help others to take advantage of the advances.

    That’s my story. That’s why I am here. That’s why I write this weekly column on the implications of Shiller’s findings. That’s why I even chide the great man himself from time to time. I want to see Shiller stop being so shy about what he has accomplished. He is the Steve Jobs of Personal Finance. But we don’t have IPhones in this field today! Because he is too shy to speak out about his huge achievements!

    I understand 100 percent if you choose not to respond to these words. But, since the subject came up, I felt that I needed to get that off my chest.


  7. Correct; buy and hold is not the correct market strategy in today’s time. Most simply put that strategy work well for select periods of time, but it will not work where the markets are today. It is actually a rather complicated discussion on why those preaching buy-and-hold want to hold onto this strategy, why this strategy worked historically and why it is flawed for today. Not sure we want to open that discussion … probably more of a white paper kind of thing.

  8. Hello Rob,
    I am glad you enjoyed the comment. You have given me a bit to respond to so please stand by …. we’re not that far apart on this topic, but we need to finish.

  9. Rob,

    Go back and read comment about the buy and hold straw man.

    Secondly, bananas, sweaters, cars and comic books are commodity items. You can grow more bananas, you can knit more sweaters, you can print more comic books and Detroit would be happy to crank out more cars. Stocks are NOT commodities. There are only so many shares. You are buying a piece of a company. Additionally, companies make money. Commodities get used up/consumed. As the saying goes, you are comparing apples to oranges.

    As to the research, you choose to believe what you want about VII and what you think about buy and hold. You have been given plenty of data on various buy, hold and rebalance strategies that have long track records of superior success.

  10. Thanks for sharing your thoughts, Sammy.

    I could be wrong. I’ve been wrong about important things before. If it were happening again, my guess is that I would be the last to know.

    Please take good care.


  11. The Buy-and-Holders are the people who say that there is no need for investors to change their stock allocations in response to big valuations shifts, Sammy.

    In every other market that exists, price discipline is the key to success. We consider price when we buy bananas and sweaters and cars and comic books. There is now 34 years of peer-reviewed research (based on 145 years of historical data) showing that the stock market is just like every other market that has ever existed — price discipline (long-term timing) is the key there too. The research shows that exercising price discipline (long-term timing) is 80 percent of the game. If you exercise price discipline, you can get everything else wrong and you are still going to do well in the long run. If you fail to exercise price discipline, you can get everything else right and you are still going to do poorly in the long run.

    That’s it.

    The Buy-and-Holders have of course said many other things. But all the other things that they have said are supported by the research and have stood up to the test of time. So I incorporated everything else that the Buy-and-Holders have said into the Valuation-Informed Indexing Model. So that’s all we are talking about here — Do valuations affect long-term returns or not? 100 percent of the research that exists today shows that valuations ALWAYS affect long-term returns in a big way. 100 percent of the research that exists today shows that the market has NEVER been efficient (which it must be for Buy-and-Hold to work even a single long-term investor).

    I wish you well,


  12. First of all, your long winded post is meant to be diversionary. You don’t want people to read the facts I put out there.

    Secondly, your comment about people “wanting to come clean” is just another one of your made up lines and is pure fantasy.

    Third, this “buy and hold” straw man is just your way of creating a fictitious boogie man that has no real definition and becomes the scapegoat for your failings. The vast majority of stock transactions are based on active trading strategies.

  13. It’s not my intent to bring anybody down, Sammy.

    The historical reality is that we did not know all we need to know about how stock investing works until 1981, when Shiller published his “revolutionary” (his word) research. The Buy-and-Holders made many wonderful contributions. I say that all the time. But they dropped the ball on one key issue — the need for investors always, always, always to be 100 percent sure to practice price discipline when setting their stock allocations (that is, to always, always, always practice long-term timing, the one form of market timing that has been working for 145 years now, as far back as we have records).

    Were the Buy-and-Holders dumb or bad to make that mistake?

    They were not.

    Bogle didn’t found Vanguard until the mid-1970s. So index funds were not available at the time when Fama did the research on which the entire Buy-and-Hold Model is based. Long-term timing only works with index funds. So Fama had no way of knowing that it was important to check whether long-term timing works. Naturally, he didn’t attempt to perform any check. He obviously couldn’t get this one right without even doing a check!

    Shiller was the first researcher to check whether long-term timing always works and is always required. He found that it is. Dozens of researchers have checked this finding in the 34 years since. Every single one has confirmed that Shiller was right. We are the luckiest generation of investors ever to walk Planet Earth. We are the first to know (at least intellectually) that it is possible to reduce the risk of stock investing by 70 percent just be being open to the idea of practicing long-term timing (I am the co-author of peer-reviewed research showing that this is so).

    So everything is great, right?

    Not quite.

    Between 1965, when Fama did his research, and 1981, when Shiller did his, tens of thousands of businesses were formed promoting the Buy-and-Hold strategy. It was promoted as “research-based.” It is not that. Shiller’s research shows that Buy-and-Hold never works in the long run. But the people who founded those businesses truly believed that Buy-and-Hold was research-based at the time they founded them. And, when Shiller showed that Buy-and-Hold can never work, they were none too excited about the idea of acknowledging their mistake.

    So as a society we developed a Social Taboo against speaking frankly about the implications of Shiller’s amazing findings. 34 years have now passed. It is now harder than ever for the Buy-and-Holders to come clean. They have been covering up Shiller’s findings for 34 years now. What to do?

    These people WANT to come clean, Sammy. I know. I have spoken to many of them and they have told me so. Others try to sneak lots of valuation-based stuff into their presentations even though it makes zero sense to consider valuations if the market is truly efficient, as Fama believed. So we are all on the same side. We all know that we need to make every investor on the planet aware of what Shiller showed and of what his research signifies.

    But how do we get from this horrible place where we are today (where the relentless promotion of Buy-and-Hold strategies has caused an economic crisis) to the wonderful place where we all want to be tomorrow (where we reduce risk by 70 percent and ALSO earn sufficiently higher returns to be able to retire five or ten years sooner than we ever imagined possible during the Buy-and-Hold Era)?

    We get there by talking frankly about this stuff. That’s my take. That’s certainly how it is done in every other field of human endeavor when huge advances are achieved.

    The reason why we have not made more progress in the past 34 years is not that this stuff is not so important. It is that it IS so terribly, terribly important. The Buy-and-Holders cannot bear to acknowledge their mistake because it has caused so much human misery and because the cover-up has continued for so many years, something that should never happen in a free society.

    You are hurting. It comes through in ever comment you advance here. You really do follow Buy-and-Hold strategies yourself and you really do hope that they will work out. But you have doubts. And you cannot bear to have those doubts encouraged by someone who writes a weekly column on Valuation-Informed Indexing. So you come here and engage in all sorts of disruption.

    That’s not the answer.

    I am sure.

    We have had thousands of people express a desire that every board and blog on the internet be opened to honest posting on these matters. That’s the answer. Once people are able to hear all the arguments pro and con, they will make their decisions. But we have to have honest posting. That means that the intimidation tactics need to go. The Buy-and-Holders need to work to rein in their emotional impulses.

    We all have a role to play in seeing that that happens. We will benefit as a society when Shiller’s ideas are discussed more openly and more freely. And so we all need to direct our energies to seeing that we complete this transition from a model for understanding how stock investing works that at one time seemed plausible to lots of smart and good people to a model that is truly supported by the peer-reviewed academic research in this field.

    I love the Buy-and-Holders. I was once a Buy-and-Holder myself. I want to work with the Buy-and-Holders to develop their ideas in ways that make it possible that they can work in the real world. That’s why I call them out on their mistakes. The Buy-and-Holders are my friends. If I had made such a mistake, I would want my friends to call me out on it. So that’s how I play it.

    I naturally wish you the best of luck in all your future endeavors, my long-time Buy-and-Hold friend.


  14. Rob,

    My comments are based on the truth and supported by facts. All one needs to do is read your posts and see that the vast majority of your posts include complaints about what you think Shiller, Bogle, Pfau and others. You want to talk about taking people Down, Down, Down? Just read your own posts. Tell us again about people going to prison, or made up death threats or defamation that are frequent topics that you bring up on your board. Who is bringing us Down, Down, Down?

    Secondly, you like to take a creative license to what people say. Notice how you make it seem that Aaron believes your negative views on buy and hold (which you have yet to fully define). I see nothing in his posts that mentions buy and hold (and what that really means).

    Third, you position yourself as an expert, yet you want to hide from the fact that your retirement plan failed and that you also don’t really follow your own investment strategy. that all cuts towards credibility and I think gives an insight to readers as to why you say what you do. You are looking for a scapegoat for your own failures.

  15. I LOVE your comment, Aaron. I don’t agree with parts of it. But it hits at the most important points in a way that not too many comments that I have seen in response to my work do. I am grateful to you for taking time out of your day to share your thoughts with us.

    I agree 100 percent with your statement that the stock market is a probability system. This is the thing about the market that I believe most people either do not get or have not explored in enough depth to appreciate in full. We never know where stocks are going over the next six months or the next year. But we always have a rough idea of the probabilities of various outcomes over the long run. We should be talking about those probabilities. To talk about them intelligently, we need to QUANTIFY them.

    You gave a sample of what a quantification of the going-forward probabilities might look like — “You have the potential of making 6 percent but you also run the risk of losing 32 percent.” There are two things missing in that statement. One, you need to say over what time-period those probabilities apply (I presume that you might have meant over the next year but I am not sure). Two, you need to explain that there is more than one set of probabilities that apply. The 6/32 may be the most likely scenario but there is always more than one.

    I don’t think that telling people “you can chase the upside if you want but you might get burned” tells them what they need to know. The general statement is always true. The reality is that the upside is very different when the P/E10 is 8 than what it is when the P/E10 is 30. And the downside is also very different in those two sets of circumstances. You need to let people compare and contrast both the upside and the downside at different valuation levels. That tells them what they need to know to know how much to adjust their stock allocation in response to various price increases. It’s that compare-and-contrast information that makes Shiller’s finding that valuations affect long-term returns ACTIONABLE in the real world.

    You suggest that anyone who read Shiller’s words carefully would see that the potential gain from going with a high stock allocation today is too great to justify the potential loss. I agree with that. But please understand that most investors are not inclined to read Shiller’s words that carefully. We all have a Get Rich Quick urge within us. We all have a natural inclination to believe that we are going to see the best possible result and avoid the worst possible result.

    People of course have a choice as to how to proceed. But we cannot expect people to take the responsible course unless we are very clear and firm in our statements as to both the upside and the downside. People tune out warnings that are worded in the way that Shiller words his warnings. He needs to be more clear. He should tell people how many years they are delaying their retirements by going with a Buy-and-Hold strategy. People need to know how dangerous and irresponsible Buy-and-Hold is. Shiller is not getting that point across forcefully enough, in my assessment.

    This is why we have bull markets. If investing analysts offered informed takes of how much the value proposition of owning stocks drops as prices increase, investors would act in their self-interest and lower their stock allocations gradually as prices increased. The selling of shares would pull prices back down to fair-value levels. Stock prices are self-regulating so long as investors are informed of the realities! The reason why we have bull markets is that investment advisors are strongly biased in the direction of overselling the benefits of owning stocks and underselling the downside. Most advisors applaud price increases! They lead investors to believe that price increases are a pure good and that sticking at the same stock allocation at all times (Buy-and-Hold) can work. Huh?

    Most investors believe what they hear from the “experts.” The result is that valuation levels go up and up and up (with small drops mixed in, to be sure) over the course of the bull portion (which can last 20 years or so) of a bull/bear cycle. Then they have to pay back all of the Pretend Gains for the market to be able to continue to function. That’s why we have price crashes. Price crashes translate into a huge loss of consumer buying power. That’s why we have economic crises. And economic crises scare investors away from stocks and cause bear markets to extend almost as long as the bull markets that preceded them.

    All of this is horrible for our entire society and all of this is 100 percent optional. If the “experts” would talk about the implications of Shiller’s “revolutionary” (Shiller’s word) findings to their clients and readers, we would never see the bull markets that set all this horror into motion in the first place. The problem is that investment advisors are compromised. The way to sell things is to make people happy with you and telling people that the Pretend Gains from a bull market are real makes them happy. Buy-and-Hold sells. Valuation-Informed Indexing works. But how many “experts” do you see advocating VII over BH in the middle of an out-of-control bull market?

    I don’t agree with you about the correction likely being 32 percent. I think you are assuming a return to fair-value price levels. We have seen four bull/bear cycles in the history of the U.S, market. In the first three, the secular bear market did not end until the P/E10 level dropped to 8 or lower. If that pattern holds true this time, we are looking at a price drop of about 65 percent.

    And the pattern is not the result of coincidence. That pattern results from the fact that Shiller is right that stock-price changes are not caused by economic developments (as the Buy-and-Holders claim) but by investor emotion (which of course is influenced to some extent by economic developments but not in an entirely rational way). Irrational Exuberance is followed by Irrational Depression because investors treat those bull-market gains as real. They plan their lives around them. When the money they were counting on to fund their retirement plans disappears, they freak out. Prices don’t drop just to fair-value levels but well below that.

    The answer once again is to give people accurate, research-based guidance AT ALL TIMES. We have to stop this stuff of pushing Buy-and-Hold strategies during bull markets and then advising everyone to get out of stocks altogether when the bear takes us down to a P/E10 of 8. We should want our markets to be stable. Stability comes from adding a brake to the car. The natural brake is an informed take on valuations. Stocks are a far less attractive asset class when prices are high than they are when prices are low or fair. We need to tell people that. And we need to do so with no hemming or hawing.

    It is my take that Shiller is engaging in a good bit of hemming and hawing about his own amazing research because he wants people to like him. That undermines the cause. When people see Shiller take a weak position, they think: “Oh, if even Shiller is not all that concerned, maybe this Buy-and-Hold stuff will end up working out after all.” Shiller knows that Buy-and-Hold can never work (or at least he should — I grant that it is possible that he is suffering from a good bit of cognitive dissonance). He needs to say that in clear and firm and unmistakable terms. Or at least so Rob Bennett sincerely believes.

    Again, I LOVED your comment. I hope that we will have further opportunities to interact. I have a blog ( where I report on these matters on a daily basis. If you have any interest in writing a blog entry expanding on your criticisms of my approach (in the same fair way that you employed here), I would be thrilled to run that article. It would be a big help to my readers (all three of them!). Anyway, that was good stuff.

    My best and warmest wishes to you and yours, Aaron.


  16. I ask people reading these words to compare this comment with the comment above by Aaron. Aaron’s is critical of my article but takes us all on a great learning adventure. This one is all emotion and just takes us all down, down, down.

    I wish that intelligent people like Aaron would take note of comments like this and point out that they show where excessive promotion of Buy-and-Hold strategies have taken us. If Shiller is right and bull market gains are phony gains, we should expect to see a lot of emotionalism evidence itself from Buy-and-Holders once they begin to lose the money they were counting on to finance their retirements. I submit that that is what we are seeing in this sort of comment.

    Anyway, I also wish you all the best that this life has to offer a person, Sammy.


  17. Also, after reviewing your stance on “Valuation-Informed Indexing” you are directionally correct, but still pretty far off the correct solution because you are not looking at the problem correctly.

  18. Rob, you are only mad because Shiller did not give you a binary response (buy/sell) to his view of the market. Market models are not binary or absolute systems and they are closer to probability systems. With the lack of a binary response you put together a pretty lame attempt to disparage his article. The fact that you would be mad about the lack of a binary response and paragraph 8 comment shows your lack of understanding around the markets, market models and the analysis of markets.

    I run my own database and create my own market analytics and I did not recreate any of Shiller’s metrics and while his metric calls for a -32% correction my own metric came in with a correction off -31% percent. The point being; Shiller is quantitatively correct and statistically accurate. More importantly he gave people an accurate and fair warning in which they can base their financial decisions. If those reading his statement are not able to discern the meaning that is their problem; not Shiller’s.

    If you look at Shiller’s comments objectively and from a higher-level you can begin to understand his point. For example, posing the following statement to you, if you were told that investing in the S&P 500 today you have the potential of making 6%, but you also run the risk of losing 32% … what would you do??? The answer is quite clear and obvious and the only people that would take issue with this answer is someone who being greedy and really NEEDS the 6% for some reason.
    In very basic terms, the above is what Shiller is communicating in his article. In terms of plain English; you can chase the upside if you got the guts, but there is significant downside risk. If your choice is to chase the upside, then don’t cry about it if you get burned.

    It doesn’t get any easier and you really should issue an apology article.

  19. Rob,

    your constant complaining about everyone else (Shiller, Bogle, Pfau, etc). Is really old. Stop blaming everyone else for your own failures. You are the one responsible for retiring way too early with insufficient savings. You are the one that decided to stay out of the market for decades, while we have seen one of the greatest bull runs. You are the one that was kicked off the various financial boards for poor behavior. In today’s’ example, Shiller warned you to not time the market with CAPE. Yet you continue to lie about it. Your failed retirement is your fault and no one else’s.

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