baranq / Depositphotos

I remember reading the article on the front page of the Latest York Times reporting on how Robert Shiller and Eugene Fama had each been awarded the Nobel prize in Economics on the identical day. The article observed that it was odd that two individuals with opposing views on how stock investing works would each receive the best honor of their field for his or her work.

It actually was odd.

Get The Full Series in PDF

Get your entire 10-part series on Charlie Munger in PDF. Put it aside to your desktop, read it in your tablet, or email to your colleagues.

Q4 2022 hedge fund letters, conferences and more

Mohnish Pabrai’s Advice On Stock “Exits”

The toughest decision every investor could have to make in some unspecified time in the future is when to sell a stock. In line with Warren Buffett, the perfect answer to this query is to avoid it altogether. Quite than buying stocks you would possibly should sell in some unspecified time in the future, he thinks it is healthier to limit your investment universe Read More

Understanding How Stock Investing Works

The opposite side of the story is that I consider that each Shiller and Fama merited 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 as strongly about Fama’s research showing that short-term market timing doesn’t work. But I consider that that was a highly vital advance. So I feel it made sense to provide them each the award.

What doesn’t make sense is that as a nation of individuals we’ve got not for the 41 years because the publication of Shiller’s research done the work needed to resolve the apparent differences between Shiller’s research and Fama’s research.

It’s not too difficult intellectually to accomplish that. The thing that’s holding us back is that doing so would bring on an unlimited change within the how-to investing advice that we provide to thousands and thousands of individuals and the experts who’ve been promoting the approach that became popular in pre-Shiller days are extremely reluctant to acknowledge that because that research was not available to them on the time they developed their strategy (Buy-and-Hold) that got some vital things very improper.

Fama showed that short-term price movements are unpredictable. So in fact short-term timing doesn’t work. Shiller showed that long-term price movements are highly predictable (stock valuations all the time move within the direction of the fair-value CAPE level of 17). There was never any evidence that long-term timing is just not required.

It will be extremely strange if there have been since investors who fail to interact in long-term timing are failing to exercise price discipline and it’s the exercise of price discipline that allows all markets to perform their essential task of setting prices properly But, because the experts didn’t have access to Shiller’s research on the time the Buy-and-Hold strategy was being developed, they jumped to the unlucky conclusion that no type of market timing works or is required.

That’s like concluding that, because drunk driving is dangerous, nobody should ever get behind the wheel of a automotive! Our economy would obviously be a fantastic deal less productive if all of us gave up the driving of cars.

However the equivalent of that happened within the stock investing realm when the concept became popular that long-term market timing is just not all the time one hundred pc required for all stock investors. Without market timing to reset prices when irrational exuberance threatens to get uncontrolled, prices get so high that we eventually see a price crash and the economic contraction that follows from the large lack of consumer buying power.

The Fama Vision And The Shiller Vision

If only we could return to the Nineteen Sixties, when Buy-and-Hold was being developed based on Fama’s research findings, and play this one over! My belief is that, if we did that, we’d all agree that market timing is completely required for all investors and we might never again experience the crazy prices which have applied in recent many years. But that’s in fact not a practical option.

I come at these issues from the attitude of a journalist, not an investment expert or an economist. I view this matter of the conflict between the Fama vision of how stock investing works (no type of market timing is idea) and the Shiller vision (short-term timing is a foul idea but long-term timing works and is required for investors who wish to keep their risk profile constant over time) as crucial public policy issue before us today.

If Shiller is correct that a big portion of today’s stock market wealth is simply the product of irrational exuberance and has no lasting economic significance, we’re due for a difficult reckoning with the stock market realities within the not-too-distant future.

We ought to be talking about it. In every single place. On a regular basis. The one option to determine the realities and to return to have faith within the conclusion we reach about them is to hunt input from a lot of smart people coming at these questions from all kinds of angles.

When the Latest York Times indicate that it was odd that two individuals with entirely different visions of how the stock market works were each awarded a Nobel prize for his or her work on the identical day, my response was that surely people everywhere in the country would read those words and launch the national debate that we want to have on the subsequent morning.

That in fact has not happened. My sense is that we feel an excessive amount of shame over the long delay that we’ve got tolerated within the launching of that debate to go in regards to the launching of it today.

So the conflict stays. Shiller and Fama cannot possibly each be right. Every investor in america must know which of the 2 of them nailed it and which of the 2 of them got at the very least one vital aspect of the stock investing query terribly improper.

Further delays within the launching of this critically vital debate serve no good purpose in any respect. Further delays just deepen our feelings of national shame.

Rob’s bio is here.