The U.S. stock market produces on average gains of 6.5 percent real per year. Where does the money come from?
Q3 2021 hedge fund letters, conferences and more
It comes from increased productivity of the U.S. economic system. Which is another way of saying it comes from learning experiences. Companies develop better means of keeping inventory under control and productivity increases. Or employees become better educated and get more done in less time. Or marketing departments get more creative and are able to do a better job of teaching consumers about the benefits of the products available for sale.
Stock Gains Come From Learning Experiences
All stock gains come from productivity and all productivity comes from learning experiences. Which leads me to a question that I like to ask my Buy-and-Hold friends. Robert Shiller was awarded a Nobel prize for his “revolutionary” (Shiller’s word) research showing that valuations affect long-term returns. How did Shiller’s findings change how Buy-and-Holders go about investing in stocks?
The answer is -- they didn’t. Buy-and-Holders buy stocks in exactly the same manner in 2021 as they did in the years before Shiller published his research. Research that causes the awarding of a Nobel prize should generate hundreds of learning experiences. And I certainly believe that Shiller’s research has changed our understanding of how stock investing works in hundreds of ways. But to the Buy-and-Hold mind, Shiller’s research counts for nothing. It might as well not exist.
I believe that there are two reasons for this.
One, people who make a living telling people how to invest according to Buy-and-Hold precepts are threatened by Shiller’s findings. When Shiller advanced our understanding, he discredited the old understanding. A lot of the Buy-and-Hold strategies no longer make sense. It makes experts who offer ideas rooted in the Buy-and-Hold model look bad for people to learn about the Shiller model (I call it “Valuation-Informed Indexing”). So it is thought by many experts in this field to be best just to pretend that the Shiller research doesn’t exist.
Two, Shiller showed that gains caused by irrational exuberance do not have the same lasting significance as gains caused by economic growth. If we all acknowledge that, we all have to accept that the true value of our stock portfolio is not nearly as high as we have been led to believe by looking at the numbers on our portfolio statements. So the average investor too has good reasons to want to pretend that the Shiller research does not exist or does not matter.
Shiller’s Research Changes Everything
As a society, we have elected to pass up the opportunity to enjoy an amazing learning experience. Shiller’s research changes everything that we once thought we knew about how stock investing works. Our retirement planning strategies need to be overhauled. It’s the same with our asset allocation strategies. And with our risk management strategies. Shiller even changed our understanding of how the stock market intersects with the general economy (with Buy-and-Hold, it is bad economic times that cause stock market losses while, with Valuation-Informed Indexing, it is stock market losses that bring on bad economic times).
Shiller’s work promises learning experiences everywhere we turn. And, as a society, we have elected to take a pass. Integrating Shiller’s research findings into our understanding of how stock investing works means change and change is often suspect. Who needs change if you have a job you like telling people how to put Buy-and-Hold strategies to work securing your financial future? Who needs change if you over the years built your portfolio value to a level where you feel that you are on a path to a comfortable financial future? Change is risky. Sometimes it feels more prudent to stick with the status quo.
The rub is that our economic system requires growth to continue making life better for us all. If we were to rule out all change, those 6.5 percent annual stock gains would no longer exist. We need learning experiences to continue living well and we should be grateful that Shiller’s research promises to provide us with many of them. Sticking with the status quo is not always the prudent course of action. Change upsets the apple cart. But blocking change brings on different kinds of risks that often appear over the course of time. I believe that the changes promised (threatened?) by Shiller’s research are changes that we must embrace.
Rob’s bio is here.
