Valuation-Informed Indexing #273
by Rob Bennett
I’ve sat down in that dentist’s chair many times in the course of my life. The basic story is always the same.
Value Partners Asia ex-Japan Equity Fund has delivered a 60.7% return since its inception three years ago. In comparison, the MSCI All Counties Asia (ex-Japan) index has returned just 34% over the same period. The fund, which targets what it calls the best-in-class companies in "growth-like" areas of the market, such as information technology and Read More
I brush. I floss. I do the basic things that all reasonably intelligent people do to take care of their teeth.
But I don’t go beyond that. Even when I should. I should visit the dentist more often for cleanings and check-ups. Dentists have told me that I have gum issues. That means that I should brush and floss more often than most other people. But I don’t. Dentists give me good advice, advice that would help me be a happier person, and I resist it. I do this over and over again. I’ve been doing it all my life.
I mean to do well. I promise to do well when I hear the good advice. But I don’t follow through. Perhaps I try to develop better habits for a short time and then grow tired of the new routine and return to the old, bad habits. Then the prospect of having to face the dentist whom I have failed causes me to experience guilt. And I push those dental appointments out even further to avoid having to face up to the guilty feelings.
I’m not the only one who behaves this way. I have talked to lots of people about this. I know.
The last time I was in the chair I was thinking about this while also marveling at the amazing dental technology available to us today. It wasn’t all that long ago when novocaine wasn’t available. Yikes! Today we have the technology needed to make dentistry virtually painless and to take x-rays that uncover problems much earlier than was possible in earlier days and to replace bad teeth with strong and attractive implants and on and on. We’ve won the battles we needed to win to make dental care what we need it to be!
Except we haven’t.
We’ve won the war on the technology side. But our human emotions continue to hold us back.
We could all enjoy great teeth and great gums far longer into our lives than we imagined possible in earlier times if only we would do our part to schedule the check-ups and cleanings that it takes to make it happen. But lots of us don’t take the simple steps needed to make the dream a reality. We fail ourselves.
It’s terribly sad.
It’s also terribly exciting if you look at things from a slightly different perspective.
What if, instead of looking at all the potential lost because we fail ourselves in the emotional realm, we looked at all the potential for big gains in the near future once we start to take more seriously the need to combine the technological advances that have become so plentiful in today’s world with the emotional advances that now appear to be within reach but that for mysterious reasons we have not elected to grasp just yet.
Investing. The column is about investing! Talk about investing.
Yale Economics Professor Robert Shiller was awarded a Nobel Prize in Economics for his “revolutionary” 1981 finding that valuations affect long-term returns. I point that out all the time in my writings. No one ever objects. No one ever says that this is not a true statement.
But yet our thinking about how investing works hasn’t changed even a tiny bit as a result of this revolutionary advance. I have challenged my Buy-and-Hold friends to list 20 changes that Jack Bogle made to his Buy-and-Hold strategy as a result of what he learned about the subject of stock investing as a result of hearing about Shiller’s revolutionary and Nobel-Prize-winning work. I’ve never gotten a response.
When that question fails to generate a response, I indicate that I would be happy to know ten changes. When that one doesn’t get a response either, I say that I would settle for five. Or one, if that’s the best that any of the Buy-and-Holders can provide. But I’ve never heard even one.
There have been no changes. We still think about stock investing in the same old way. Despite the 34 years of peer-reviewed research showing that that old way of thinking is gravely flawed. Despite the Nobel Prize. Despite the economic crisis (which Shiller predicted in a book published in March 2000).
It reminds me of the dentistry situation. We have advanced intellectually. But we lag emotionally. So we are not seeing the benefits of our intellectual advances that we otherwise would be seeing.
What did Shiller show?
He showed that valuations affect long-term returns.
That’s a correct answer. But not one that gets to the essence of the matter. Shiller showed that investors are emotional. If we were rational, there would be no such thing as overvaluation. If we acted in our own best interests, we would set stock prices properly, we would assign our investment holdings their fair value. But we are not entirely rational. We are highly emotional. So the numbers we see on our portfolio statements often bear little resemblance to the ones we would be looking at if we set prices properly. Over-valuation is a real phenomenon and thus, since a market cannot continue to function unless prices eventually match the economic realities, we know whenever we see very high prices that future stock returns will be poor until the match is achieved.
This changes everything. Every strategic question relating to investing must be reconsidered in light of Shiller’s finding. This is one case in which the use of the word “revolutionary” is not even a slight exaggeration.
For a long time, most of the work done by humans was done in the physical realm. A time came when we learned to make machines and achieved great advances by enjoying the leverage that comes when an internal combustion engine does the pushing rather than our legs. We gained even more leverage when we entered the Information Age and developed ways to quickly spread knowledge of better ways to do things far and wide.
In the next stage we will learn together how to manage our emotions more effectively. We will retire earlier. And we will have better teeth!
Rob Bennett’s bio is here.