That’s a dumb thing to say. Of course irrational exuberance is bad. Is there anyone who thinks otherwise? This is one of the few questions re which we have universal agreement. The first word in the two-word term gives the game away. Irrationality is bad. So irrational exuberance, something that causes us to be fooled into not knowing the true and lasting value of our stock portfolio, has to be bad.
Except….
There’s that CAPE value. The fair-value CAPE is 17. Today’s CAPE is 38. We have collectively elected to price stocks at more than two times their fair value. No one forced us to do that. It was a free choice. The stock investors of the United States have chosen to generate more irrational exuberance than any earlier group of investors. The highest CAPE ever was 44. We are not quite at that level. But pretty darn close. Give us another six months, you know?
So the objective evidence is that it is not entirely true that we all view irrational exuberance as a bad thing. The objective evidence is that there is something about it that we like quite a bit. Irrational exuberance is bad in a good way.
Like smoking. That’s bad. But people do it. Smoking is bad in a good way too.
And overeating. That’s one that affects just about everybody. Everyone knows it is bad. And just about everybody feels tempted at times to go there. Overeating is bad in a good way.
Procrastination. That’s bad in a good way. It serves no constructive purpose. But is there anyone who does not procrastinate at times?
The common theme here is addictive behavior. Addictive behavior does not make sense. It causes a person to be less happy than he would be if it were not for the addictive behavior. And addictive behavior is very hard to overcome. I have been trying to eat less for as long as I have been alive. I have never struggled with smoking. I never picked up that addiction. So I never feel a temptation to smoke. But the overeating one gets to me from time to time.
What is the worst kind of addiction? It is the addiction that you are not aware is bad. There was a time when people did not know that smoking causes cancer. There was more smoking then. There was no voice in a smoker’s head telling him not to do it. So he just let himself go. It can happen that way with overeating. A person can get into bad eating habits during the Winter, when he is not as active as he is in the Summer and when the extra clothes he wears hide the extra weight, even from himself. There are a lot of things that people turn to in an effort to overcome their addictions. The most important one is the simple step of recognizing the addiction. It’s not possible to overcome an addiction of which one is not aware.
That’s why I think it is useful to make the simple observation that irrational exuberance is bad, as dumb of an observation as that is. It doesn’t take any intellectual power to recognize that irrational exuberance is bad. But becoming aware of that reality is a remarkable and powerful thing. We know from looking at today’s CAPE value that few appreciate the point today. And we know from our experience with other addictions that it is a liberating step just to become aware of the addiction. People change their lives in amazing ways by becoming aware of their addictions. They free themselves to accomplish things that they never dreamed they could accomplish during the time when they were slaves to the addiction.
How often do you hear someone say that irrational exuberance is addictive? I don’t believe that I have ever heard someone other than me say it. I suppose that you could say that Robert Shiller came close. He wrote a book titled “Irrational Exuberance.” So he certainly helped spread awareness of the general phenomenon. But do you know what’s crazy about that book? Shiller never directly states that buying the same amount of stocks when they are terribly overpriced as when they are reasonably priced is addictive behavior. He never offers advice on how to break the addiction. I say that the answer is to practice valuation-based market timing. Shiller rarely says that, except implicitly.
That’s strange. I believe that it’s a delicate matter. People don’t like being told about their addictions. They respond defensively. But they need to be told. It’s your friends that tell you that you need to examine your self-destructive behavior. If irrational exuberance really is bad, we should be helping each other overcome the horrifying addiction that is responsible for this horrible CAPE value.
