Valuation-Informed Indexing #294
by Rob Bennett
Carlson Capital's Black Diamond Arbitrage fund is up 5.77% for the first eight months of the year, including a 1.72% return for August. Last year, the fund returned 2.39% for the whole year. Q3 2021 hedge fund letters, conferences and more The fund consists of merger arbitrage mainly consisting of signed or "rate of return" Read More
Robert Shiller says in his book Irrational Exuberance that: “On several occasions I have discovered firsthand the pressure on public prognosticators to deliver positive statements about the market. Once, just before going on national television, the anchor looked me squarely in the eye and told me that what I said could conceivably have an impact on the market, and that people can get upset if they perceive prognosticators as disrupting the market.”
I’d like to know what Buy-and-Holders think of that statement. Buy-and-Hold is rooted in the belief that it is economic developments, not investor emotion, that determine stock prices. If that were so, nothing that Shiller said could affect the market. Do Buy-and-Holders think that the television anchor’s worries were foolish ones?
I don’t think they were foolish so much as dangerous. What Shiller or anyone else says certainly can affect market prices. Buy-and-Holders agree even though they follow a strategy rooted in a belief that only economic developments matter. I know because it is Buy-and-Holders who have insisted that I be banned at the 20 investing sites at which I have gotten the boot. If what I said didn’t matter, why would the Buy-and-Holders want to see me banned? The Buy-and-Holders haven’t convinced even themselves that only economic developments matter.
We all filter out information that disturbs us because it threatens our confidence in our world view. Conservatives filter out information advanced by liberals and liberals filter out information advanced by conservatives and it has ever been so. It’s a universal phenomenon. What possible reason could there be for believing that it doesn’t work that way with stocks? A man hears what he wants to hear and disregards the rest.
I filter out information casting doubt on the merit of the Valuation-Informed Indexing strategy. I am not aware of doing so and I understand that it’s a bad idea to do so. I need to know the drawbacks more than anyone else does. It is foolish for me to tune out the words of my critics. But it’s hard to imagine that I do not often do so. Humans always tune out stuff they don’t want to hear. Is that not so?
And it always hurts us. That’s also so.
That’s why I see such a huge opportunity in Shiller’s research. If we were to begin taking Shiller’s research seriously, we could overcome the force that has made stock investing risky since the beginning of time. That force is self-deception. Do away with self-deception and you change the game in a fundamental way.
Many people think it can’t be done. Since we always have engaged in self-deception re stocks, they think we always will. I am more hopeful because Shiller’s P/E10 metric quantifies the effect of self-deception. Now that we can tell people the dollar-and-cents price of following Buy-and-Hold strategies, we can persuade them to ditch the self-deception. People like to make money. We now have the tool we need to motivate investors to demand that Shiller and lots of others tell them the straight story.
Even Shiller does not tell the straight story today. It is not my intent to be critical with that statement but to point out how deep the problem goes. Shiller’s next words in the passage that I quoted above are: “He was right, of course, to give me such advice, and I shudder to think that I (or anyone else) could ever help cause a market event that would cost some people their fortunes.”
The television anchor invited an expert onto his television show and then discouraged that expert from sharing his true beliefs with his listeners. How could that possibly be the right thing to do? The television anchor should be ashamed of himself. Shiller should be proud of himself for sharing this revealing anecdote and also a little ashamed as well for soft-peddling the danger of the practice (which is widespread) described.
Everyone does what the television anchor did.
The newspapers celebrate price jumps even though all they do is raise the price of stocks, a good that all of us who hope to be able to retire someday must buy.
Investment advisors brag about the good advice they gave when prices rise even though all price increases greater than those justified by the economic realities (that is, all price increases greater than the 6.5 percent real price increase that has been the price increase that has applied in the U.S. market for as far back as we have records) are temporary cotton-candy gains fated to be blown away in the wind as time passes.
Retirement calculators assume 6.5 percent gains on a going-forward basis even when prices are insanely inflated and it is obviously unrealistic to expect such gains.
Everyone lies in the stock investing field. Because everyone demands lies. Those who don’t lie are silenced. Those who don’t lie make the ones who do lie look bad. A bull market cannot survive truth-telling. And we all like those pretend cotton-candy gains. For obvious reasons.
Two paragraphs down from the passage cited above, Shiller tells a different anecdote:
“One investment manager for a pension plan spoke to me about how difficult it was for him to suggest in his public statements that people should perhaps be concerned about overpricing of the stock market. Despite his considerable reputation and apparent sympathy with the views expressed in my book, he seemed to be saying that it was not within his authority to make bold and unprovable statements contrary to conventional wisdom. He seemed to view his charge as interpreting received doctrine and that it would be considered a dereliction of duty to voice contrary opinions that came only from his own judgment.”
We expect doctors to express their own judgment. That’s why they get paid the big bucks. It’s the same with baseball umpires. And with accountants. And with lawyers. And with engineers. And with every other kind of professional. The person giving investing advice is the only exception to the otherwise universal rule.
Because of what the television anchor said to Shiller. Question Pretend Gains and they might disappear. No one wants that. And so the Pretend Gains grow bigger and bigger and bigger until the cost associated with their disappearance (which is ultimately inevitable) becomes so large that it causes an economic crisis.
It’s a problem.
Rob Bennett’s bio is here.