Valuation-Informed Indexing #100
by Rob Bennett
Robert Shiller is my hero. All of the work that I have done in the investing field is an effort to show investors how to implement the revolutionary insights that Shiller advanced in his research of the past three decades and in his book Irrational Exuberance. Shiller has changed the history of investing analysis in a profound and positive way. We will be exploring the implications of his findings for decades.
A decade ago, no one talked about tail risk hedge funds, which were a minuscule niche of the market. However, today many large investors, including pension funds and other institutions, have mandates that require the inclusion of tail risk protection. In a recent interview with ValueWalk, Kris Sidial of tail risk fund Ambrus Group, a Read More
Still, he’s human.
Shiller’s flaw (in my assessment) is that he pulls his punches. His insights really are revolutionary, and, to his credit, he uses that word in the subtitle of his book. But most of today’s investors don’t realize that the revolution has begun. Shiller appears on interviews and say things a little off from what the other guests say. But he rarely makes clear why his model for understanding how stock investing works is so different from the model used by 90 percent of today’s investing analysts.
Consider what I say up in that first paragraph. I have devoted 10 years of my life to the project of writing articles and developing calculators and recording podcasts and producing column entries that explore Shiller’s model. That shouldn’t be possible. In a sensible world, there would have been hundreds of Shiller-centric sites in place when I came on the scene in 2002. There weren’t any then and there aren’t any now. If anyone reading these words knows of a good site devoted solely to exploring the implications of the Shiller model (other than my own, of course), I would be grateful if you would let me know about it.
There are no sites on the Shiller model. That’s because most people, even most of those who appreciate Shiller’s contributions, are not aware that Shiller has developed a new model. When Shiller appears on interviews, he is asked the same questions as the other guests. Those questions often do not make sense to someone who follows the Shiller model. It’s not Shiller’s fault that interviewers don’t always ask super-informed questions. But he never objects. He politely does his best to give reasonable answers. That’s nice enough. But it doesn’t do the job of getting the word out that there is today an entirely different way of thinking about how stock investing works.
The Shiller model doesn’t even have a name!
I call it “Valuation-Informed Indexing.” In ordinary circumstances, it would not be my place to give a name to an investing model developed by a Yale economics professor. But what was I to do? I have written hundreds of articles exploring the implications of Shiller’s ideas. It gets awkward devoting so many words to something that doesn’t have a name. At some point, I realized that I had to give the thing a name myself. And so the “Valuation-Informed Indexing” moniker was born.
Does Shiller agree with my thoughts on the meaning of his research?
I don’t know.
I contacted him once to let him know about my work. I of course would like an endorsement. And, in the event that Shiller does not agree with my thinking, I have an obligation to let my readers know that. Shiller did not respond to the e-mail. I don’t think it is because he does not read unsolicited e-mails. When I was developing one of my calculators, he responded to an e-mail about how the historical data he presents at his web site was formulated. My guess is that Shiller does not want to speak on the implications of his findings to a greater extent than he has in his book.
His would generate huge amounts of controversy if he did. Shiller’s ideas are a challenge to the investing establishment. When his ideas become popular, the textbooks in this field are going to need to be rewritten.
Shiller is a cautious man. All academics share this trait. So this is not an entirely surprising observation. But in Shiller’s case the caution is extreme, given the boldness of the ideas at issue. If you have read Shiller’s book, I have a question for you. How should an investor who believes that Shiller is right change his investing decisions as a result?
No one knows.
Or at least no one knows for sure.
Shiller does not address this question in his book. it is the most important question. And the man himself is silent on it. I have all sorts of thoughts along these lines. But I am not Shiller. I should be supplementing or critiquing Shiller’s take on implementation questions. The exceedingly odd reality is that my take on the implementation of investing strategies under the Shiller model is in most cases the only take available today. That’s so strange.
My guess is that Shiller is holding off on addressing implementation questions until he believes that the time is ripe for people to listen with open minds to what he has to say. He has said in interviews that he has never told us all that he knows about stock investing because he believes that he would be perceived as “unprofessional” if he did so. That won’t be so after the next crash. After the next crash, people will be desperate to hear about a new approach. My speculation is that Shiller has concluded that opposition to his ideas would today be so great that he is better off biding his time until the environment is more accepting.
Shiller may be right in his assessment. But I sure would like to know more. And I hate to think that it is going to take another stock crash for us all to learn more. I’d like to see more people get involved in efforts to explore the implications of Shiller’s work so that we can begin making progress on our own before hearing the Master’s take on how we should be directing our thinking re these matters.
Rob Bennett has written about why you might or might not want to read investing newsletters. His bio is here.