Valuation-Informed Indexing #277

by Rob Bennett

In 1954, 45 percent of U.S. adults smoked. Today, smokers comprise less than 18 percent of the population. That’s change.

It didn’t happen quickly. Doctors have been making the case against smoking for many years.

And it didn’t happen with ease. Lots of programs that people thought would bring down the smoking rate did not produce results. Getting smokers to quit is a hard business.

But it can be done. Cutting the smoking rate by more than half has saved millions of lives. If we can change smoking behavior, we can change investing behavior.

This is my answer to people who tell me that we will never see a day when investors will not get carried away by the Get Rick Quick frenzy of bull markets, that my belief that someday most investors will gain better control of their emotions and learn to adjust their stock allocations in response to big shifts in stock valuations. Change of this sort really is hard. But the humans are not impossible cases. Good things can be achieved in the emotional sphere just as good things can be achieved in most other spheres.

I have never smoked. But I believe that my reactions to the battles between those who favor tighter restrictions on smoking and those who oppose such restrictions tell a tale as to how change of this sort can be achieved gradually over time.

In earlier days, I opposed restrictions on smoking. My natural inclination is to let people make their own choices, even if that means that many will make bad choices. I have found my opposition to smoking restrictions softening over the years as the theory of letting people be free to make their own mistakes came into contact with the reality of what freedom to smoke means in the practical realm.

I remember being with a friend in a restaurant in the days before all restaurants either banned smoking or permitted it only in special sections. A smoker lit up a few tables away and my friend waved her hands in front of her face and made ugly faces. I didn’t say anything. But I was embarrassed. I felt that she was making a fuss over something that did not amount to much. The smoker wasn’t hurting us. Why not let him enjoy his pleasure?

I still think that philosophical view makes sense. But I have gradually come to realize that my perceptions of what constitutes a fuss and what doesn’t are affected greatly by what behaviors I have become accustomed to seeing.

There was a time when it was common for people to light up cigarettes in elevators. Those days were long gone by the day when my friend expressed her annoyance at the smoker lighting up a few tables away from ours. But on that day there were still restaurants that permitted smoking, either across the board or in special sections. In my mind, the change in social conventions that ruled out smoking in elevators was a good one but the change that my friend was insisting on — a ban on smoking in restaurants — was not. It was only when the tolerance of public smoking lessened that I came to be able to see the merit of my friends’ intolerance for that bit of smoker freedom.

A number of years later, it had become common to see smoking prohibited in restaurants and even smoking in designated sections was becoming increasingly rare. One day, I happened to visit a restaurant that permitted smoking in all sections. I found myself feeling sick halfway through my meal. I had to step outside and get fresh air.

The reaction amazed me. Nothing like that had ever happened to me in the days when smoking was not restricted. I had become sufficiently accustomed to taking in smoke-filled air that it didn’t bother me. But people like my friend possessed more sensitivity to smoke. I now realized that they had been complaining for good reasons. If smoking really was making people feel sick, it obviously should be restricted.

I still feel sympathy for smokers. It makes me sad to see them lighting up in the cold winter months outside of their places of employment. But I now feel greater respect for those who push for more restrictions on smoking. I now understand that there are good reasons why others do not share my tolerance for smoking.

What changed me?

More than anything else, it was the change in social attitudes. Smoking was so common in my boyhood that the idea that smoking should be prohibited in many circumstances seemed extreme. Smoking might be bad. Smoking might kill people. But it would always be with us. After all, it really had long been with us. We humans have a tendency to believe that what has long been will always be.

There is nothing that anyone could have said in earlier days to persuade me that tight restrictions on smoking were a good idea. But over time I have come around, at least to some extent. Changes that cannot be achieved overnight in many cases can be achieved gradually.

Most people today view the idea that investors should change their stock allocations in response to big valuation shifts as an “out there” idea. And it probably is not realistic to think that most people will change their thinking on the subject overnight.

But I believe that we will see big changes take place if those of us who believe in Shiller’s research make the case in a clear and firm and non-apologetic way. We won’t win the battle in a day. We will take small steps forward followed by more small steps forward. But one day we will look up and see that we have walked a long ways.

It all starts happening when we work up the courage to speak up. So long as we view the end goal as unattainable, we remain stuck in a world where stock investing is a far more risky activity than it should be. We need to be like my friend at the restaurant and express our concerns. Some will look funny at us (I know how it goes). But we will win them over in time if we continue to fight the good fight.

Rob Bennett’s bio is here.