I remember reading the article on the front page of the New York Times reporting how Robert Shiller and Eugene Fama had been awarded the Nobel Prize in Economics on the same day. The article observed that it was strange that two people with opposing views on how investment in shares the works will both receive the highest honor in their field for their work.
It was certainly strange.
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Understand how stock investing works
The other side of the story is that I believe Shiller and Fama deserved the award. Shiller’s research revolutionized our understanding of how stock investing works. So I feel no hesitation in saying that he deserved to be recognized with a Nobel prize.
I don’t feel so strongly about Fama’s research showing that short-term market timing doesn’t work. But I believe it was a very important advance. So I thought it made sense to give both of them the award.
What does not make sense is that as a nation we have not for the 41 years since the publication of Shiller’s research done the necessary work to resolve the apparent differences between Shiller’s research and the research of fame
It is not too difficult intellectually to do so. The thing that remains is that doing so will bring a huge change in the investment advice that we offer to millions of people and the experts who promoted the approach that became popular in the pre-Shiller days are extremely. reluctant to acknowledge that because this research was not available to them at the time they developed their strategy (Buy and hold) that got some important things very wrong.
Fama has shown that short-term price movements are unpredictable. So, of course, short-term timing doesn’t work. Shiller showed that long-term price movements are very predictable (stock valuations always move in the direction of the CAPE level of the value of 17). There has never been evidence that long-term timing is unnecessary.
It would be extremely strange if there were since investors who fail to engage in long-term timing do not exercise price discipline and it is the exercise of price discipline that allows all markets to do their essential task of setting prices correctly. experts did not have access to Shiller’s research at the time the Buy-and-Hold strategy was developed, they jumped to the unfortunate conclusion that no form of market timing works or is necessary.
It’s like concluding that because drunk driving is dangerous, no one should ever get behind the wheel of a car! Our economy would obviously be much less productive if we all gave up driving cars.
But the equivalent of this happened in the investment in shares reign when the idea became popular that long-term market timing is not always 100 percent necessary for all stock investors. Without the market time to reset prices when irrational exuberance threatens to get out of control, prices become so high that eventually we see a price crash and the economic contraction that follows from the enormous loss of purchasing power of the consumer.
Fama’s view and Shiller’s view
If only we could go back to the 1960s, when Buy-and-Hold was developed based on Fama’s research findings, and play this! My belief is that if we did that, we would all agree market timing it is absolutely necessary for all investors and we would never again experience the crazy prices that have applied in the last decades. But this is definitely not a practical option.
I come at these issues from the perspective of a journalist, not an investment expert or an economist. I see this as a matter of conflict between Fama’s view of how stock market investing works (no form of market timing is a good idea) and Shiller’s view (short-term timing is a bad idea, but the long-term time works and is necessary for Investors who want to keep their risk profile constant over time) as the most important public policy problem before us today.
If Shiller is right that a large part of the wealth of the stock market today is only the product of irrational exuberance and has no lasting economic meaning, we owe it to a difficult calculation with the reality of the stock market in the future not too distant.
We have to talk. Everywhere. All the time. The only way to understand the facts and to have confidence in the conclusion we reach about them is to seek input from many intelligent people who come at these questions from all kinds of angles.
When the New York Times pointed out that it was strange that two people with completely different views of how the stock market works were both awarded a Nobel prize for their work on the same day, my reaction was that surely people in the whole country reads. those words and launch the national debate that needs to be done the next morning.
That of course did not happen. My sense is that we feel too much shame for the long delay we have tolerated in the launch of that debate to go ahead with the launch today.
So the conflict stops. Shiller and Fama can’t be right. Every investor in the United States needs to know which of the two nailed it and which of the two got at least one important aspect of the stock investment question horribly wrong.
Further delays in launching this critically important debate will serve no good purpose. Further delays only appear our feelings of national shame.
Rob’s biography is here.