irrationalexuberance
ValueWalk
The Buy-and-Holders made a terrible mistake. Robert Shiller’s Nobel-prize-winning research showing that valuations affect long-term returns was not available at the time the strategy was being developed and they advanced the dangerous idea that market timing/price discipline might not always be required. Now we are stuck in a crazy twilight zone where we know from the research that it is but in which most of us are afraid to point out that the Buy-and-Hold emperor is wearing no clothes because it makes them feel bad for people to learn about the mistake. I think we all need to make an effort t...
ValueWalk
I have been a journalist for my entire working life. But I changed the subject that I cover about halfway through my career. The first half was spent covering budget and tax legislation. The second half was spent writing about stock investing. On the surface, these seem to be two very different subjects. The reality is that in important respects they are similar. The reason why I tired of writing about budget bills is that it came to seem a futile endeavor. The purpose of explaining to people what is going on in budget negotiations is to help them understand the issues better so that the polic...
ValueWalk
Irrational exuberance – it’s a bad thing. Shiller’s book title does not have an exclamation point at the end. It’s a silly thing to say. Of course irrational exuberance is a bad thing. Who ever thought otherwise? Only everyone. How To Combat Irrational Exuberance?I entered into the Google search engine a search for “how to combat irrational exuberance.” I can’t say that it turned up anything that knocked my socks off. The most relevant comment was one by Former Federal Research Chairman Alan Greenspan, who is the person who originated the term. “Once a bubble emerges, it is difficult to do any...
ValueWalk
I’m a big believer in market timing. Not short-term timing, to be sure. To engage in short-term timing is just to engage in guessing games as to when price shifts will arrive, which is foolishness. But long-term timing is a very different story. The peer-reviewed research that I worked on with Wade Pfau shows that long-term timing (adjusting your stock allocation in response to big price changes for the purpose of keeping your risk profile constant over time) always works, permitting investors who employ it to achieve higher long-term returns at greatly reduced risk. Q4 2022 hedge fund letters...
ValueWalk
Irrational exuberance. Shiller published his book by that name in early 2000. He published the research showing that irrational exuberance is a real thing in 1981. So we have as a society had plenty of time to develop a battle plan aimed at overcoming it. The Truth About Irrational ExuberanceThe truth is, the problem is worse than ever. From 1996 forward, we have seen the worst stock prices in the history of the U.S. market. We have now identified the biggest risk of stock investing (I co-authored research with Wade Pfau showing that investors can reduce the risk of stock investing by nearly 7...
ValueWalk
I wrote last week about how statements discouraging market timing/price discipline are wealth destroyers. It would be impossible for the CAPE level ever to rise to the level where it resides today if most investors practiced market timing whenever the price of stocks got so high as to put their risk profile out of whack. However, the penalty associated with high stock prices is not felt until the market crashes and the resulting loss of wealth brings on an economic crisis. We need some way to make it clear to investors how dangerous it is to let stock prices get gradually out of hand. Q4 2022 ...
ValueWalk
Not all stock gains are real. When price increases push the CAPE value above its fair-value level (17), those price increases are irrational exuberance, not the true and lasting gains that are generated by increases in economic productivity. That’s the point of Shiller’s Nobel-prize-winning research showing that valuations affect long-term returns. Long-term returns are largely predictable because the fair-value CAPE level exerts a magnetic pull on stock prices until they return to fair-value levels. Q2 2022 hedge fund letters, conferences and more That reality exerts a powerful influence on o...
ValueWalk
Sometimes I am in a bookstore and I take a look at the personal finance section. Robert Shiller’s book Irrational Exuberance is on the shelves. I always wonder how my Buy-and-Hold friends react to seeing the two words of that title. Keeping Irrational Exuberance In CheckDoes exposure to those two words scare them? Those two words tell the story of stock investing that Buy-and-Holders prefer to ignore. Irrational exuberance cannot possibly be a good thing. Everyone gets that. Q2 2022 hedge fund letters, conferences and more If irrational exuberance is a real thing (why would Shiller have writte...
ValueWalk
Irrational exuberance is off the charts today. The CAPE value on the day I write these words is “30.” Since the fair-value CAPE value is 17, that means that nearly half of the value of the stock market is rooted in nothing more than investor emotions. People tell themselves that “I have a portfolio worth $500,000” and they don’t stop to think that the true and lasting value of that portfolio might be something between $250,000 and $300,000. So we believe. But we don’t fully believe. Q2 2022 hedge fund letters, conferences and more When Irrational Exuberance Goes PoofIf we fully believed, the i...
ValueWalk
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