Valuation-Informed Indexing #292
by Rob Bennett
For the first quarter of 2022, the Voss Value Fund returned -5.5% net of fees and expenses compared to a -7.5% total return for the Russell 2000 and a -4.6% total return for the S&P 500. According to a copy of the firm’s first-quarter letter to investors, a copy of which ValueWalk has been able Read More
Robert Shiller is a liberal. Eugene Fama has never publicly discussed his political views but there’s at least some reason to believe that he might have sympathy for libertarian views given that he comes from the University of Chicago. Jack Bogle is a moderate Republican.
What does any of this have to do with investing?
It might be that our political views have more influence on how we think about investing than we realize. Our world view influences our views on all sorts of subjects. Why should investing be different?
Shiller is a big-time Keynesian. He believes that the government should play a significant role in managing economic growth. Keynesianism is the mainstream economic belief today. But it wasn’t always so. Prior to the Great Depression, it was laissez faire (a concept with much appeal to libertarians) that was the conventional view. It’s hard not to wonder if part of the reason why Shiller and Fama have come to such different conclusions about how stock investing works is that they are starting from very different premises re how the world works in general. And perhaps Bogle (whose signature trait, in my assessment, is a common-sense practicality) represents the mid-point between the two idealogical extremes.
One reason why I am interested in this question is that I have been surprised to see how my great respect for Shiller has influenced my own political thinking. I was liberal in my early days and have shifted to a conservatism harder than Bogle’s in recent decades (primarily because of a strong distaste for political correctness, which spoils modern-day liberalism for me — that’s the journalism blood evidencing itself!).
I am not offended by Shiller’s strong advocacy of Keynesianism. Most people are not. But I have a few hard conservative friends who take exception even to elements of the New Deal. My view is that the Depression represented the failure of pure capitalism and only the big step in the other direction achieved through the New Deal saved it.
But my conservative inclinations stop me from buying entirely into Shiller’s economic thought. I like it that Keynesianism acknowledges the psychological dimension of the economic story that libertarians reject with their belief in Rational Man Economics. But I am repelled by the reality that in the real world the government intervenes in the economy in only one direction. When the economy slumps, Keynesians argue that we need to prime the pump. But when the economy overheats, we rarely hear them cry out for government intervention to slow the economy. Keynesianism is smart in theory but is ruined by the unfortunate political realities, according to my way of looking at things.
It hit me one day that that mixed view on Keynesianism explains well why I am drawn to the Valuation-Informed Indexing concept. Valuation-Informed Indexers have zero confidence in the ability of investors to make rational choices without help. But we don’t trust the government to supply the help needed. We instead seek to achieve both juicing of the economy when it is slow and slowing of the economy when it is juiced through private means — widespread promotion of the 35 years of peer-reviewed research showing that stocks offer an amazing deal when they are underpriced and a poor deal when they are overpriced. We reject the old style of laissez faire that proved itself wanting in the days leading up to the Depression but embrace a form of “intervention” rooted in education re the realities discovered in the past three decades.
This way of looking at things may explain one of the great mysteries of Shiller’s thinking that has long baffled me. Shiller has been reluctant to explore the most far-reaching implications of his research findings. Why? I wonder if it might be that he quickly concluded that it is the government’s role to help us recover from economic troubles caused by overpriced stocks without even considering the possibility that investors could be trained to bring prices back to reasonable levels by pursuing their self-interests in a more enlightened way than they ever have in the past.
My guess (that’s all it is) is that Bogle does not concern himself much with these philosophical matters. He strikes me as an intensely practical man (I mean that as a compliment — this is something that impresses me very much). Bogle has seen Buy-and-Hold work for millions (I don’t think it has worked but my view is very much a minority one — most think it has worked very well indeed) and that’s what matters in his mind.
I suspect that Fama is entranced by the spell of the Rational Man concept. I don’t think that investors behave rationally but the full reality here is that Fama’s belief that they do has generated many powerful and genuine insights. One can hardly find too much fault in him for allowing himself to take the basically good idea a bit too far. My guess (again, it’s not possible to offer more than surmises here) is that Fama has a hard time crediting the idea that it is emotion that drives stock price changes. Shilled’s research shows that to be so. In my mind it is clear as clear can be that this is the case. But for someone who believes what libertarians believe (as Fama might), that’s a hard sell.
We are all trying the best we can to make sense of the world. We gain confidence in paradigms that seem satisfactory for a time. Then new developments take place that shake that confidence. Perhaps we turn to new ideas or perhaps we decide that losing confidence in the paradigm that has worked in the past is too high a price to pay. That’s how it works (in my assessment!).
We make a mistake when we become too sure that the other guy’s views on politics or investing or anything else are too out there to be worthy of serious consideration. Smart and good people disagree about even the most fundamental and seemingly simple points all the time. The trick is to appreciate the need to rethink one’s own views at least a little bit when one learns that there are smart and good people who have come to very different conclusions on important matters.
Rob Bennett’s bio is here.