I’m a big-time advocate of valuation-based market timing. In a world wherein valuations affect long-term timing (the world we live in, in line with Robert Shiller’s Nobel-prize-winning research), valuation-based market timing is critical. It’s the means by which investors rein in irrational exuberance before it gets uncontrolled and causes a price crash and an economic collapse.

Buy-and-Holders oppose market timing.

Strong case for valuation-based market timing

The case for valuation-based market timing is so strong that I sometimes wonder if Buy-and-Holders should not pondering of valuation-based market timing after they advance statements opposing market timing. In reality, there have been many cases wherein I even have seen a Buy-and-Hold oppose market timing after which describe the issues with the guessing-game approach to market timing to elucidate the opposition. The Buy-and-Holder might indicate that, for market timing to work, the investor must be right re each his guesses as to when to lower his stock allocation and when to extend it. That’s after all so for guessing-game market timing but not for valuation-based market timing.

Is it possible that the controversy is merely one in every of semantics and that Buy-and-Holders are only wonderful with investors changing their stock allocation for the aim of keeping their risk profile constant at times when stock prices get out of hand?

I don’t think that that’s possible. If Buy-and-Holders appreciated the importance of investors practicing price discipline through valuation-based market timing, they might pay little bit of attention to the CAPE level and work with investors to be sure that they never permit the CAPE level to rise to the extent where it resides today. Buy-and-Holders have a protracted history of evidencing indifference to valuation increases, which strongly suggest that they simply don’t appreciate the importance of valuation-based market timing.

That said, I do consider that it was their opposition to guessing-game market timing that caused the Buy-and-Holders to oppose market timing in the primary place. Shiller’s research had not been published on the time when Buy-and-Hold was being developed. So I think that every one that the Buy-and-Holders had in mind after they initially got here out in opposition to market timing was the guessing-game approach. It was only when Shiller’s research was published in 1981 that those that follow the research became aware of how necessary it’s that every one investors practice valuation-based market timing (no market can remain functional if market participants refrain from exercising price discipline). By the point the research showing the realities was published, Buy-and-Holders had been finding fault with market timing on the whole for a few years and a defensiveness that caused them to need to blur the excellence between the 2 types of timing kicked in.

Valuation-based market timing is just not guessing-game market timing. If Shiller is correct that it’s investor emotion that’s the dominant reason for stock price shifts, there isn’t any way that any investor could effectively predict when price shifts would happen – how could anyone predict a phenomenon not governed by rational considerations? So guessing-game market timing is out. But there may be nothing even a tiny bit irrational about expecting prices to correct ultimately once they get wildly out of whack. It’s the core purpose of a market to set prices properly. So investors who change their stock allocation in response to big price swings can possess a high degree of confidence that prices will move within the expected direction in some unspecified time in the future in the long run.

So I don’t consider that the Buy-and-Hold opposition to valuation-based market timing is in any respect deep. Had Shiller’s Nobel-prize-winning research been published before the Buy-and-Hold strategy was developed within the Nineteen Sixties, our Buy-and-Hold friends would all be practicing valuation-based market timing today. The difficulty is that, once they took a public position that market timing on the whole is just not needed or won’t even work, they became reluctant to acknowledge the error. The undeniable fact that the error is undoubtedly the worst one ever made within the history of investment evaluation (what may very well be worse than cutting off the potential for price discipline for your entire market?) had made the strategy of getting the error acknowledged and corrected an exceedingly difficult one.

I think that the Buy-and-Holders possess a sincere desire to follow research-based strategies. Once they see that their opposition to valuation-based market timing is just not viable in a long-term sense (a continued reluctance on the a part of investors to practice valuation-based market timing will eventually cause one other price crash and economic collapse), they’ll happily retreat from their long-term opposition to the shape of market timing that at all times works and is at all times one hundred pc required for each investor in search of to maintain his or her risk profile constant over time.

Rob’s bio is here.