The Idea That Valuation-Based Market Timing Is Not Required Is Reinforced Each Time the Non-Adjusted Stock Price is Quoted

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It’s not logic that persuades the human mind. It’s repetition.

There was a time when people accepted slavery. No logical case can be made for it. But people saw it practiced every time they looked around at the world surrounding them. The message received by their brain was that “this is normal.” People believe what they see.

When I was a boy and my family would visit the families of friends of my parents, there would be ashtrays in the living rooms. Even people who did not smoke provided ashtrays for visitors who did. It would have been considered impolite not to do so. I cannot remember the last time that I visited a house in which there were ashtrays placed in the living room. There was a time when it was a thing that was done. Now it is a thing that is not done.

The percentage of people who smoke has dropped over those years. It’s not a coincidence. Every time someone saw an ashtray in a living room, a message was sent to his or her brain that “this is normal, this is how life is lived.”

Higher stock prices are dangerous

There was a headline the other day reporting that it was “A good day for 401(k)s: S&P 500 and Dow hit new highs.” That’s not a good day in my book. The CAPE value on the morning of that day was in the low 30s, close to the CAPE value that brought on the Great Depression. It of course rose as a result of the new highs. So dangerous stock prices became even more dangerous.

I understand that most investors of today are Buy-and-Holders and that to the Buy-and-Hold mind an increase in stock prices is the result of rational investors making rational choices. To that way of thinking, a price increase is always justified and is always good news because higher stock prices signify a stronger economy. That’s not how a Valuation-Informed Indexer looks at things. We believe that stock prices higher than those justified by the economic realities (that is, prices higher than those that generate a CAPE value of 17) are bad news. Irrational exuberance misleads investors re the value of their stock portfolio and places the stock market in danger of a price crash and the economic system in danger of a collapse when trillions of dollars of consumer buying power disappear.

So it is a matter of some controversy whether that day’s price increase was indeed good news or not. A more fair journalistic account would have added “according to the Buy-and-Holders” following the claim that the day of price increases was “a good day.” I appreciate that in today’s world (a world with a CAPE value in the 30s it is asking a lot to expect such language to appear following such a statement. Buy-and-Hold thinking is omni-present at times of hgh stock prices. We are all saturated in Buy-and-Hold thinking today.

That’s a problem.

An obvious truth

Repetition persuades. The idea that high stock prices are good stock prices is not an obvious truth. It is a contention often repeated by people who believe in one particular model for understanding how stock investing works. The unfortunate thing is that claims like the one made in the news account are made in so subtle a manner that few investors are even aware that a contentious claim is being advanced. Of course high stock prices are good stock prices! Has anyone ever questioned it?

Someone has questioned it. The fellow who questioned it was awarded a Nobel prize for publishing the research raising the questions. So the questions are serious. But they are not taken seriously enough to even be mentioned when claims that high stock prices are good stock prices are advanced. Such claims are iterated over and over and over again in such subtle ways that investors are not even aware that they are being advanced. Which means that the chances that investors would scrutinize those claims are very small.

What if we added a line to portfolio statements in which we reported what a person’s stock portfolio is worth after the official number was adjusted for the amount of irrational exuberance present in the stock price at the time the portfolio statement was issued? That would cause people to think about what Shiller showed in his 1981 research. That would cause people to be less happy with unjustified price increases and more realistic in their financial planning. If that new line were included with each monthly portfolio statement, Shiller’s breakthrough insight would be presented to the investors who need to become aware of it over and over and over again.

Like the way that the Buy-and-Hold way of thinking about stock prices is presented to them today.

Rob’s bio is here.