Lots of people read Robert Shiller’s Irrational Exuberance. I’m different. I took what the guy said seriously.
Shiller taught me how to value stocks in a way that makes sense. Lots of people use the Price/Earnings Ratio. Shiller explains why that doesn’t work (changes in the economy cause earnings to go through shifts from artificially low levels to artificially high levels and that throws the valuation numbers off). He instead uses P/E10 (today’s price over the average of the last 10 years of earnings). That has always done a good job of warning investors when stocks are priced so high that the long-term value proposition is poor. So P/E10 is what I use too.
I am the co-developer (with John Walter Russell, owner of the www.Early-Retirement-Planning-Insights.com site) of The Stock-Return Predictor, a calculator that uses the P/E10 tool to tell investors how stocks are likely to do over the next 10 years, assuming that stocks perform in the future anything at all as they always have in the past. People look at the numbers that apply when we are at today’s valuation level (one of the highest ever seen on record) and call me a “bear.” That hurts my feelings. I am not a bear.
I am not.
I’m kidding around a bit here but in an effort to make a serious point. Does it make someone a bear for that person to report how stocks are likely to perform over the next 10 years? It shouldn’t. Most people think of bears as being pessimistic. Is it a pessimistic act just to report what the numbers say about how stocks have always performed going forward from these valuation levels? I don’t see it. It seems to me that that is just the honest and accurate and proper thing to do. Shouldn’t we want to know the realities?
I have come to believe that stock investing is a highly emotional endeavor. We don’t like to acknowledge this because it scares us to death. We all have lots of money riding on our ability to understand how investing works and, if we are as emotional about this subject as I strongly believe we are, we are incapable of thinking straight about it. Yowsa!
I’m a reporter. I report things. That’s how I’ve made my living for a long time. Never have I seen such an emotional reaction to anything I have reported as I have seen after reporting what the historical data says about how stocks are likely to perform over the next 10 years.
I’m not a bear. I’m a reporter. It’s not that I am pessimistic. It’s that so many people have put so many unrealistic ideas into our heads that we have come to believe that anyone who reports straight the realities of stock investing is a bear. That’s my sincere take.
I love stocks. But I don’t believe that we should always have most of our money in stocks. I believe that we should buy stocks in the same way we buy everything else we buy, with a consciousness of the importance of the price we are paying. Stocks are priced awfully high today. Caution is in order.
That’s not a bear talking. That’s a guy who likes to obtain good value propositions for his money whether he is buying stocks or anything else.