How’s that for a provocative headline?
Most readers are going to react by thinking “of course honest posting is permitted! What an insulting thing to say! Is he suggesting that there is some giant conspiracy to mislead people about how stock investing works?”
Q2 hedge fund letters, conference, scoops etc
Those words don’t precisely describe my beliefs. But they are a close enough approximation to make most investors uncomfortable hearing too much about my beliefs.
Is there a giant conspiracy? Yes and no. I don’t believe that a bunch of people met in a room and decided to mislead. What I like to say is that there is a conspiracy of ignorance. Up until 1980, we only knew a limited number of things about how stock investing works and, given what knowing that limited number of things told us, Buy-and-Hold looked like a very plausible strategy. Robert Shiller changed that when he published his Nobel-prize-winning research showing that valuations affect long-term returns. If Shiller’s research is legitimate, stock investing risk is not stable but variable and investors who want to maintain a constant risk profile over time have no choice but to adjust their stock allocations in response to big valuation shifts. But most of us have not incorporated Shiller’s findings into our understanding of how stock investing works because the old understanding permits us to continue to believe that the numbers on our portfolio statement accurately reflect the true, lasting value of our portfolio and we like being able to continue to believe that.
This is why it has become so controversial to explore the far-reaching implications of Shiller’s research findings. Tell people that, when stocks are priced as they are today, half of the value of each investor’s stock portfolio is comprised of nothing but the product of irrational exuberance and you cause them to feel more worry than they already feel about whether or not they will be able to retire at a reasonable age. So not too many of us do that.
We all prefer to be honest. We all try. But there are things that cannot be said if we are collectively going to continue to remain in the dark re the how-to implications of Shiller’s “revolutionary” (his word) research. So most of us don’t say those things. Leaving out important information that people need to hear to invest effectively is a form of dishonesty. So, yes, it is fair to say that I am saying something insulting. Please understand, though, that I direct the insult to myself as well as to all others. I held off saying what I knew about the errors in the Buy-and-Hold retirement studies (they don’t include an adjustment for the valuation level that applies on the day the retirement begins) for three years because I was afraid of what reaction I would see when I worked up the courage to do so.
There’s an interesting wrinkle to this. We can’t be honest because honesty would upset all of the people counting on the amount reported on their portfolio statement being real to finance their retirement hopes. So the only way that we will ever feel free to speak plainly would be if valuations fell dramatically. And it is our collective dishonesty that is keeping valuations high. We need to see valuations fall to speak with full candor about this important subject matter but it is our lack of full candor that is keeping valuations where they are. What a mess!
I have been trying to persuade people to speak with full candor about what the peer-reviewed research in this field teaches us for a long time (17 years!). I have had some big successes. I have had people tell me that I am the first person who they have heard talk about stock investing in a way that made complete sense to them. I have had big-name experts tell me that they learned amazing things about this subject matter from me, a fellow who possesses no particular credentials showing that I know more than most others about stock investing. But I think it would be fair to say that I have experienced more failures than successes. I am banned at so many sites that I can’t even remember the precise number of bans anymore. I have seen lots of once good friends turn their backs on me and refuse further communication with me. I have not been able to earn a dime for that entire 17 years. Telling people things that they don’t want to hear about stock investing is not the easy road to wealth and fame!
Still, I soldier on. I believe that a price crash is coming in the next year or two or three. If we see prices drop just to fair-value levels (they have dropped far, far below that at the end of all earlier bull/bear cycles), we will see trillions of dollars of spending power disappear from our economy. Ten of thousands of business will go under. Millions of workers will lose their jobs. Getting this investing stuff right matters!
The primary reason why I solder on is that I believe that we are going to see a huge leap forward in our understanding of how stock investing works once prices fall hard. If it really is the high prices that apply today that make so many so reluctant to hear Shiller’s message, a drop in prices should remove the resistance to the learning experience that I have been encouraging us all to embrace for so long now. It’s not that this stuff is too hard for most people to understand. It’s that, for so long as prices are crazy high, most people don’t want to understand.
What happens when that changes, when the cause of the psychological resistance to accepting that inflated stock prices are the product of irrational exuberance disappears? Hundreds of investing insights that we have been denying ourselves for many years will become available to all of us in the space of a few months. That will be something to see. That will be exciting stuff.
Stock investing will never be the same. It’s not just that we will be able to report the safe withdrawal rate accurately. Everything about how stock investing works will change when large numbers begin to feel safe saying out loud what they truly believe about this important subject matter. If high prices hurt us, we should be discouraging high prices, not celebrating them. Doesn’t that reversal of polarities change everything? I believe that it does. I believe that our best days are ahead of us.
If we could just bring on that price crash and thereby complete the first task in the project of putting it behind us!
Rob’s bio is here.
