Robert Shiller: Mass Psychology Supports The Pricey Stock Market

Ted

FYI: Canny stock investors are like judges in a quirky beauty contest. They aren’t looking for real beauty but for qualities that other people believe still other people will find beautiful.

That was the observation of John Maynard Keynes, who suggested that investors do not actually make money by picking the best companies, but by picking stocks that waves of other traders will want to buy.

Investing, in other words, is an exercise in mass psychology.
Regards,
Ted
https://www.nytimes.com/2017/09/15/business/stock-market-mass-psychology.html?mcubz=3

Sven

Professor Shiller has been saying this for several years now. Since nothing happen and the herd continues to plow forward. Haven't we all seen this before prior to dotcom and subprime bubbles?

The more pertinent question is what to do to protect the downside? Personally I have been rebalancing to other asset classes with low correlation to equity on quarterly basis. I like to hear other viewpoints.

Old_Skeet

Hi @Sven,

I too have been more conservative within my portfolio and have been moving money left within my portfolio into more conservative asset positions due to relative high asset valuations. I have reduced the number of equity funds in my domestic equity sleeve (from six to three) along with reducing the large/mid cap sleeve (from six funds to three) and in the global growth sleeve reducing the number of funds there (from six to three) and moving a good bit of this money into mostly hybrid funds. In addition, some of this money was used to restart my CD ladder along with using some idle cash.

This rebalance (of sorts) has take place over time (last couple of years) and was not done in one setting. In addition, while I have reduced the number of equity positions I have strived to maintain good sector weightings in what I call the "Big Three Sectors" of technology, financials and heath care. In addition, overweighting the materials and utility sectors this year has, thus far, also turned out to be a positive.

The use of hybrid funds was done for multiple reasons. One, the ones I chose kick off relative good income distributions ... and, two, they usually position in the faster moving market currents of both the fixed and equity sides. Thus far, this seems to have been a good move for it has increased my income generation by about ten to fifteen percent (from where it was a year ago) while at the same time helped produced some good overall portfolio returns.

For me it has been: "So far ... So good."

Peace.

Old_Skeet

Junkster

Sven said:

Professor Shiller has been saying this for several years now. Since nothing happen and the herd continues to plow forward. Haven't we all seen this before prior to dotcom and subprime bubbles?

The more pertinent question is what to do to protect the downside? Personally I have been rebalancing to other asset classes with low correlation to equity on quarterly basis. I like to hear other viewpoints.

Hard to answer not knowing your age and whether you are in the accumulation or preservation stage. This seems though like the most unloved bull market ever. As for asset classes with low correlation I would be very careful. There is an academic Pied Piper who has been preaching this approach for over a decade. First it was via collateraized commodity futures ala PCRIX/PCRDX then it was managed futures via AQMIX/QMHIX and we have seen how that has turned out. Now it's reinsurance via SRRIX which recently took a 11% hit one week. All the while that some are embracing uncorrelated assets the markets just keep hitting one new high after another. Seems the winners and those accumulating the wealth as always are the investors staying the course in plain vanilla index funds that mimic the market who don't fret about market timing.

Edit. That should have been SRRIX above not SSRIX now corrected

davidrmoran

@sven

>> other asset classes with low correlation to equity

What do you take those to be?

Edmond

The topic is primarily about human/herd behavior/behavioral finance. I tend to be pessimistic given current asset-values and (my perceived -) complacency of market participants.

We each should ask ourselves: are we being reasonably compensated for the risks which are always inherent in owning equities. If the answer is "yes", then, if one is adequately asset-allocated, there is not much too do. If the answer is "no" then, I suppose we could maintain equity positioning, but its not something I would do. What to do then:

-Sell down to one's comfort level on longer-duration assets (equities, long-dated debt instruments.
-Buy protection: purchase out-of-the-money puts

I kinda wish to ask : "Tulips, anyone?"

Nobody can (consistently) get timing right. We can only evaluate the market and decide to what degree we wish to be playing in the sandbox, given market (and our own) circumstances.

Junkster

Edmond said:

The topic is primarily about human/herd behavior/behavioral finance. I tend to be pessimistic given current asset-values and (my perceived -) complacency of market participants.

We each should ask ourselves: are we being reasonably compensated for the risks which are always inherent in owning equities. If the answer is "yes", then, if one is adequately asset-allocated, there is not much too do. If the answer is "no" then, I suppose we could maintain equity positioning, but its not something I would do. What to do then:

-Sell down to one's comfort level on longer-duration assets (equities, long-dated debt instruments.
-Buy protection: purchase out-of-the-money puts

I kinda wish to ask : "Tulips, anyone?"

Nobody can (consistently) get timing right. We can only evaluate the market and decide to what degree we wish to be playing in the sandbox, given market (and our own) circumstances.

Thanks! One of the better posts I've seen on this board. I am worried too but I am always worried. I use a very disciplined sell strategy based on decline off highs on whatever I am trading.

Old_Joe

@Edmond: Nicely done! Succinct and to the point(s).