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bootman's review against another edition
5.0
I tried reading a Robert Shiller book prior to really understanding investing, the markets, and economics. Since I started reading books on investing, I kept hearing this book being cited by other authors, so I finally picked it up. This is a great book that explains how markets are irrational, what causes bubbles, and what you can do to critically think before speculating with your investments.
ashrafulla's review against another edition
4.0
This book is a good read as a sobering reminder if the pitfalls of only investing in stocks and only listening to people who tell you to avoid FOMO by only investing in stocks. The arguments of the book were built before the dot com bust and the subprime crisis that lent credence to these arguments.
I do worry that Shiller is quite dismissive of quantification in the arguments. He took a jab at statistical significance but more importantly he didn't ascribe probabilities to all of the possible calamities in Part Five. Every decision is based on risk and reward and I would've liked a more A-B discussion on what you are risking when you go down a stock-heavy investment path.
I enjoyed the dissection of bull market commentators, but I most liked the dissection of efficient market theorists. Shiller's general argument is that the data does not fit the efficient market hypothesis (valuations are too volatile) and the caveats don't work (because they can't explain price action). This is correct. If there is one thing to get from this book, it is a deeper doubt regarding the efficiency of markets.
I recommend the book understanding its minor pitfalls, because it is worth seeing the thorough criticism of efficiency in the stock market.
I do worry that Shiller is quite dismissive of quantification in the arguments. He took a jab at statistical significance but more importantly he didn't ascribe probabilities to all of the possible calamities in Part Five. Every decision is based on risk and reward and I would've liked a more A-B discussion on what you are risking when you go down a stock-heavy investment path.
I enjoyed the dissection of bull market commentators, but I most liked the dissection of efficient market theorists. Shiller's general argument is that the data does not fit the efficient market hypothesis (valuations are too volatile) and the caveats don't work (because they can't explain price action). This is correct. If there is one thing to get from this book, it is a deeper doubt regarding the efficiency of markets.
I recommend the book understanding its minor pitfalls, because it is worth seeing the thorough criticism of efficiency in the stock market.
__karen__'s review against another edition
4.0
Considering the current Gamestop stock frenzy, this seems like a timely read.
gvenezia's review
5.0
An important treatise on the oversized impact of structural and psychological biases in supposedly efficient, rational markets.
With these aims in mind, Schiller takes on dominant narratives and economic theories by examining three major markets—bonds, stocks, and real estate. Showing again and again how recency bias, herd mentality, post hoc reasoning, and many other biases create convincing but false narratives about markets, Schiller relentlessly compares recent events to historical ones. Taking care to emphasize real prices over nominal prices, Schiller shows that recently received “wisdom” often simply ignores or misreads long-term data. In many cases, Schiller can actually show that recent “wisdom” is actually contradicted by the usual market dynamic.
Schiller makes a good case overall, but such a massive, paradigm-defining undertaking could have benefitted from more thorough examples and discussion for each of the structural and psychological factors he discusses.
I felt the need to read the book twice because I felt like I had missed small but important steps or examples in Schiller’s arguments. On my second read I was able to connect the dots better; I also confirmed that many of the connecting steps are in fact just a few sentences or small examples. Schiller’s quick moving, paradigm-defining arguments are appropriate for the popular press, but I felt the need for stronger engagement with counterexamples and arguments in the chapters themselves.
In some cases, Schiller overstates his arguments. For example, he claims that owner-occupied housing is a weak long-term investment relative to stocks (33). Now, I acknowledge that US housing prices have barely appreciated more than inflation over the long run:
However, national trends aren't all that relevant to personal investment decisions. Throughout Chapter 3, Schiller gives examples where rapidly growing, strong economic cities—like Boston, Chicago, and Los Angeles—experience housing bubbles: prices rise rapidly and then at some point fall dramatically. But even in the data he provides, housing prices are still higher over the long-term. In some cases, there is robust and significant appreciation (real increases of 3-5% over 30 to 100+ years). Additionally, he doesn’t discuss any areas that go through price depreciation and why that might happen. Intuitively it makes sense to me that housing prices would fall in Rust Belt cities and rural areas that haven’t pivoted with the rise of the creative class—think Detroit and St. Louis and small towns across the Midwest whose population is around half of what it was in their heydays. These falls would then be averaged out in national figures by the areas that are in high demand. If one thinks there are good reasons for certain areas to loose value, there must be corresponding areas that gain value to counterbalance them in the national figures.
Furthermore, home ownership seems like a good investment not principally because of price appreciation, but because of leverage and opportunity cost. If you are able to get a reasonable interest rate and own your property long enough (5 to 15+ years), it is likely that mere inflation will 1. lower your mortgage payments in real terms, and 2. raise the price of the house. This means you can pay a fraction of the cost upfront for a large asset—which then appreciates on the full value of the house. At the same time, your mortgage payment is a small fraction of the total cost—which declines in real cost over the years. In contrast, rent will just keep increasing with inflation. Assuming you have to live somewhere, this can be a good tradeoff for many household’s situations. Perhaps it’s not right to call housing an investment, but comparing the opportunity costs of stocks and owner-occupied housing, there are reasons to contest Schiller’s idea that real estate is worse in the long-term.
That said, Schiller does take a few paragraphs to note caveats and qualifications: his claim is primarily about national home prices, "regional real estate booms are nothing new" (22). But given the complications and potential confusions for such a large topic in a single chapter, and the fact that most people are only buying one home in a regional market, Schiller would have done better by sticking to just the macroeconomic argument, instead of commenting on whether buying a house is a good investment.
Despite my strong reservations about this particular argument, the book’s arguments in general are strong and make one contemplate common, fundamental assumptions about markets. I certainly re-evaluated my view of bubble dynamics and the supposedly superior value of stocks over the long-term. Thus, Schiller’s book serves as an important salve to the constant onslaught of media narratives and societal cliches about the economy.
Significant Themes and Quotes
Lack of relevant data market data and events to explain or forecast booms and busts:
"Ultimately, we learn how to forecast by looking at past episodes. Unfortunately, there are not really any past episodes of national home price booms in the United States to look at, except for the period just after World War II, and that episode appears to have been fundamentally different from the recent home price boom. We have only one observation of the spectacular crash of U.S. home prices after 2006, so it is hard to know how to generalize from this experience. This presents a dilemma for statisticians who want a scientific basis for their forecasts.” (21)
Market Analysts as Optimistic Marketers:
"Analysts affiliated with investment banks gave significantly more favorable recommendations on firms for which their employer was the co- or lead underwriter than did unaffiliated analysts, even though their earnings forecasts usually were not stronger.” (49)
"According to a study by Steven Sharpe of the Federal Reserve Board, analysts’ expectations of growth in the S&P 500 earnings per share exceeded actual growth in nineteen of the twenty-one years between 1979 and 1999. The average difference between the projected and actual growth rate of earnings was 9 percentage points. The analysts breezed through both the steep recession of 1980–81 and the recession of 1990–91, making forecasts of earnings growth in the 10% range.16 Since Sharpe’s study, analysts failed to predict the magnitude of the sharp drop in earnings around 2001.” (50)
The Increase in the Gambling Mindset and its Attendant Losses:
"In the United States, commercial gambling, both legal and illegal, experienced about a sixty-fold increase in real (inflation-corrected) terms between 1962 and 2000.37 According to a 2000 telephone survey, 82% of adults in the United States gambled in the preceding year, up from 61% in a 1975 study.38 The amount lost on gambling by people in the United States in 2000 was more than they spent on movie tickets, recorded music, theme parks, spectator sports, and video games combined.” (59)
Stock Market and Real Estate:
"In our questionnaire surveys of recent homebuyers in 2003 and 2004, Karl Case and I asked homeowners directly about possible feedback from the stock market to the housing market.
. . .
"The great majority of respondents said the stock market had no effect on their decision to buy a house. This is actually not at all surprising, since most people have a multitude of personal reasons to buy a house that must figure more prominently in their minds. But the interesting thing about these answers is that, of those who replied that the experience did affect their decision to buy a house, an overwhelming percentage said that it encouraged them. In fact (taking account of the rounding error in the percentages given), more than ten times as many said that the stock market encouraged them than said it discouraged them.” (97-98)
"The drops in the stock market in 2000–2003 had just gotten people increasingly fed up with the stock market and ready to transfer their affections to another market, one that they increasingly believed was the best investment for them. It is as simple as that; what they wrote seems plain and easily understood. There was a sort of cross feedback from the stock market to the housing market, and that must account for a good part of the housing boom that we saw.” (99)
Internet Hype in the Millennium Boom:
“[T]he arrival of the Internet in the mid-1990s was interpreted by many casual observers as a fundamental change that would boost the productivity of the economy, since the Internet is a communications and distribution system of fundamental importance. But, if we wish to consider whether the Internet is a communications and distribution system that will produce faster economic growth than in the past, we have to compare it with similar systems of the past, such as those represented by postal services, railroads, telegraph, telephones, automobiles, aircraft, radio, and express highways. All of these networks had profound effects on the economies of their days, helping transform their economies from a much more primitive state. It is
difficult to argue that the Internet is more important to the growth of our economy today than these were to the growth of economies of the past, and so there is no reason to expect faster growth than in the past.” (123-124))
Narratives Are Derived From Stock Market Movements:
"Conventional wisdom interprets the stock market as reacting to new era theories. In fact, it appears that the stock market often creates new era theories, as reporters scramble to justify stock market price moves. The situation reminds one of the Ouija board, where players are encouraged to interpret the meaning of movements in their trembling hands and to distill forecasts from them. Or the stock market is seen as an oracle, issuing mysterious and meaningless pronouncements, which we then ask our leaders to interpret, mistakenly investing their interpretations with authority.” (126)
Productivity Growth is not tightly linked to market gains:
"The statistics on the growth of labor productivity made some impressive gains in the United States in the late 1990s. This helped confirm, in many people’s minds, the advantages that the Internet and other new forms of high technology were offering to the economy, and was seen as justifying the appreciation in the stock market. And yet the high productivity growth in the late 1990s was partly a data error: the U.S. Bureau of Labor Statistics revised the 1998–2000 growth figures substantially downward in 2001, well after the stock market boom.33 Moreover, even to the extent that the productivity growth numbers were good, people read far too much into them. The numbers became a justification for admiring the Internet, when in fact the growth of productivity then had nothing to do with the fledgling new Internet, which was not yet a significant factor in the overall economy. Even beyond this, people didn’t realize how tenuous the historical relation between productivity growth and stock market gains really is.34 Productivity growth hasn’t been a reason to expect the stock market to do well. But the story in the 1990s that the reported productivity growth justified and explained the spectacular stock market appreciation was too good for stock market boosters and the news media to pass up.” (139)
Stocks are not always better than bonds in the long-term:
"The “fact” that Jeremy Siegel pointed out in his book Stocks for the Long Run in 1994, is that in the United States there has been no thirty-year period over which bonds have outperformed stocks. The supposed fact is not really true, since, as Jeremy Siegel himself pointed out in his book, stocks underperformed bonds in the period 1831–61.7 That may seem like a long time ago until one realizes that there have not been that many non-overlapping thirty-year periods in U.S. stock market history: only five such periods since 1861. There have been many overlapping thirty-year periods, but of course these are not independent pieces of evidence. Given the relatively short history of thirty-year periods of stock market returns, we must recognize that there is little evidence that stocks cannot underperform in the future. Siegel himself acknowledges this in the 2014 fifth edition of Stocks for the Long Run, published after the post-2000 correction, which brought more thirty-year intervals of U.S. stock market underperformance. The Moody’s Aaa Corporate Bond Total Return Index outperformed the S&P 500 Total Return Index in thirty-year periods ending in 2010 and 2011." (216)
. . .
Moreover, the United States may itself be the exception rather than the rule in terms of real returns on the stock market. Philippe Jorion and William Goetzmann have studied the real stock market appreciation rates (excluding dividends) for thirty-nine countries for the period 1926–96 and found that the median real appreciation rate was only 0.8% per year for these countries (compared to 4.3% per year for the United States).
"The evidence that stocks will always out-perform bonds over long time intervals simply does not exist. Moreover, even if history supported this view, we should recognize (and at some level most people must recognize) that the future will not necessarily be like the past. For example, it could be that, with investors buoyed by past successes in the stock market, there is now widespread over- investment. Companies may have hatched too many ambitious plans and spent too much on product development and promotion; therefore, they may not do as well as they have in the past. There was indeed substantial over-investment in the 1990s and 2000s, and this was a major factor in the world economic slowdowns starting in 2001 and 2007.
. . .
"So the “fact” of the superiority of stocks over bonds is not a fact at all. The public has not learned a fundamental truth. Instead, their attention has shifted away from some fundamental truths. They seem not to be so attentive to at least one genuine fundamental truth about stocks: that they are residual claims on corporate cash flow, available to stockholders only after everyone else has been paid. Stocks are, therefore, by their very definition, risky." (217)
Don’t throw the baby out with the bubble-bath water:
"Although the precise causal links are hard to disentangle even in these
dramatic episodes, one thing we do know about interest rate policy is that it affects the entire economy in fundamental ways, and that it is not focused exclusively on the speculative bubble it might be used to correct. It is whole-body irradiation, not a surgical laser. Moreover, the genesis of a speculative bubble is a long, slow process, involving gradual changes in people’s thinking. Small changes in interest rates will not have any predictable effect on such thinking—big changes might, but only because they have the potential to exert a devastating impact on the economy as a whole.
"The onset of the Great Depression of the 1930s was in fact substantially due to monetary authorities’ trying to stabilize speculative markets through interest rate policies, although the markets they were focusing on most were not the stock markets but the markets for their own currencies. Countries attempted to preserve the fixed exchange rate system, represented by the gold standard, against attacks. The countries that gave up earliest and abandoned their efforts to defend their currencies were the ones to emerge from the depression the soonest.” (227-228)
Markets are obsessed with conventional future valuation, not true value:
"[Market] participants [try] to buy into their predictions of the conventional valuation of assets in the near future, not the true value.
"A key Keynesian idea is that the valuation of long-term assets is substantially a matter of convention, just as it is with judgments of facial beauty. Whatever price people generally have come to accept as the conventional value, and that is embedded in the collective consciousness, will stick as the true value for a long time, even if the actual returns fail for some time to live up to expectations. If an asset’s returns are carefully tabulated and disappoint for long enough, people will eventually learn to change their views, but it may take the better part of a lifetime. And many assets, such as owner-occupied homes, do not have unambiguously measured returns, and a mistaken “conventional valuation” based on a faulty popular theory can persist indefinitely. The presumed investment advantages of, say, living in an expensive, land-intensive single-family home near a big city, rather than renting a cheaper and more convenient apartment in an urban high-rise, may just not exist, and most people will never figure that out.” (258-259)
[This book] is an attempt to characterize the complex nature of our real markets today, considering whether they conform or do not conform to our expectations and models.
. . .
[It] challenge[s] financial thinkers to improve their theories by testing them against the impressive evidence that suggests that the price level is more than merely the sum of the available economic information. (xxvi)
With these aims in mind, Schiller takes on dominant narratives and economic theories by examining three major markets—bonds, stocks, and real estate. Showing again and again how recency bias, herd mentality, post hoc reasoning, and many other biases create convincing but false narratives about markets, Schiller relentlessly compares recent events to historical ones. Taking care to emphasize real prices over nominal prices, Schiller shows that recently received “wisdom” often simply ignores or misreads long-term data. In many cases, Schiller can actually show that recent “wisdom” is actually contradicted by the usual market dynamic.
Schiller makes a good case overall, but such a massive, paradigm-defining undertaking could have benefitted from more thorough examples and discussion for each of the structural and psychological factors he discusses.
I felt the need to read the book twice because I felt like I had missed small but important steps or examples in Schiller’s arguments. On my second read I was able to connect the dots better; I also confirmed that many of the connecting steps are in fact just a few sentences or small examples. Schiller’s quick moving, paradigm-defining arguments are appropriate for the popular press, but I felt the need for stronger engagement with counterexamples and arguments in the chapters themselves.
In some cases, Schiller overstates his arguments. For example, he claims that owner-occupied housing is a weak long-term investment relative to stocks (33). Now, I acknowledge that US housing prices have barely appreciated more than inflation over the long run:
[For] home prices since 1890 . . . there appears to be no overall continuing uptrend in real home prices. It is true that for the United States as a whole, real home prices were almost twice as high in 2006 as in 1890, but all of that increase occurred in two brief periods: the time right after World War II . . . and a period that appears to reflect a lagged response to the 1990s stock market boom . . ., with the first signs of increase occurring in 1998. Other than those two periods, real home prices overall have been mostly flat or declining. Moreover, the overall increase (with real prices up 48% in the 124 years from 1890 to 2014, or 0.3% a year) was not impressive. (27)
The pattern of change from year to year in home prices bears no consistent relation with [building costs, population, or interest rates]. None of these can explain the “rocket-taking-off” effect starting around 1998. Building costs have been mostly level or declining all the way back to 1980, with no major break in the trend. Population growth has been very steady. While interest rates have been declining, the decline in long rates has been fairly steady, all the way back to the early 1980s. (21-22)
However, national trends aren't all that relevant to personal investment decisions. Throughout Chapter 3, Schiller gives examples where rapidly growing, strong economic cities—like Boston, Chicago, and Los Angeles—experience housing bubbles: prices rise rapidly and then at some point fall dramatically. But even in the data he provides, housing prices are still higher over the long-term. In some cases, there is robust and significant appreciation (real increases of 3-5% over 30 to 100+ years). Additionally, he doesn’t discuss any areas that go through price depreciation and why that might happen. Intuitively it makes sense to me that housing prices would fall in Rust Belt cities and rural areas that haven’t pivoted with the rise of the creative class—think Detroit and St. Louis and small towns across the Midwest whose population is around half of what it was in their heydays. These falls would then be averaged out in national figures by the areas that are in high demand. If one thinks there are good reasons for certain areas to loose value, there must be corresponding areas that gain value to counterbalance them in the national figures.
Furthermore, home ownership seems like a good investment not principally because of price appreciation, but because of leverage and opportunity cost. If you are able to get a reasonable interest rate and own your property long enough (5 to 15+ years), it is likely that mere inflation will 1. lower your mortgage payments in real terms, and 2. raise the price of the house. This means you can pay a fraction of the cost upfront for a large asset—which then appreciates on the full value of the house. At the same time, your mortgage payment is a small fraction of the total cost—which declines in real cost over the years. In contrast, rent will just keep increasing with inflation. Assuming you have to live somewhere, this can be a good tradeoff for many household’s situations. Perhaps it’s not right to call housing an investment, but comparing the opportunity costs of stocks and owner-occupied housing, there are reasons to contest Schiller’s idea that real estate is worse in the long-term.
That said, Schiller does take a few paragraphs to note caveats and qualifications: his claim is primarily about national home prices, "regional real estate booms are nothing new" (22). But given the complications and potential confusions for such a large topic in a single chapter, and the fact that most people are only buying one home in a regional market, Schiller would have done better by sticking to just the macroeconomic argument, instead of commenting on whether buying a house is a good investment.
Despite my strong reservations about this particular argument, the book’s arguments in general are strong and make one contemplate common, fundamental assumptions about markets. I certainly re-evaluated my view of bubble dynamics and the supposedly superior value of stocks over the long-term. Thus, Schiller’s book serves as an important salve to the constant onslaught of media narratives and societal cliches about the economy.
Significant Themes and Quotes
Lack of relevant data market data and events to explain or forecast booms and busts:
"Ultimately, we learn how to forecast by looking at past episodes. Unfortunately, there are not really any past episodes of national home price booms in the United States to look at, except for the period just after World War II, and that episode appears to have been fundamentally different from the recent home price boom. We have only one observation of the spectacular crash of U.S. home prices after 2006, so it is hard to know how to generalize from this experience. This presents a dilemma for statisticians who want a scientific basis for their forecasts.” (21)
Market Analysts as Optimistic Marketers:
"Analysts affiliated with investment banks gave significantly more favorable recommendations on firms for which their employer was the co- or lead underwriter than did unaffiliated analysts, even though their earnings forecasts usually were not stronger.” (49)
"According to a study by Steven Sharpe of the Federal Reserve Board, analysts’ expectations of growth in the S&P 500 earnings per share exceeded actual growth in nineteen of the twenty-one years between 1979 and 1999. The average difference between the projected and actual growth rate of earnings was 9 percentage points. The analysts breezed through both the steep recession of 1980–81 and the recession of 1990–91, making forecasts of earnings growth in the 10% range.16 Since Sharpe’s study, analysts failed to predict the magnitude of the sharp drop in earnings around 2001.” (50)
The Increase in the Gambling Mindset and its Attendant Losses:
"In the United States, commercial gambling, both legal and illegal, experienced about a sixty-fold increase in real (inflation-corrected) terms between 1962 and 2000.37 According to a 2000 telephone survey, 82% of adults in the United States gambled in the preceding year, up from 61% in a 1975 study.38 The amount lost on gambling by people in the United States in 2000 was more than they spent on movie tickets, recorded music, theme parks, spectator sports, and video games combined.” (59)
Stock Market and Real Estate:
"In our questionnaire surveys of recent homebuyers in 2003 and 2004, Karl Case and I asked homeowners directly about possible feedback from the stock market to the housing market.
. . .
"The great majority of respondents said the stock market had no effect on their decision to buy a house. This is actually not at all surprising, since most people have a multitude of personal reasons to buy a house that must figure more prominently in their minds. But the interesting thing about these answers is that, of those who replied that the experience did affect their decision to buy a house, an overwhelming percentage said that it encouraged them. In fact (taking account of the rounding error in the percentages given), more than ten times as many said that the stock market encouraged them than said it discouraged them.” (97-98)
"The drops in the stock market in 2000–2003 had just gotten people increasingly fed up with the stock market and ready to transfer their affections to another market, one that they increasingly believed was the best investment for them. It is as simple as that; what they wrote seems plain and easily understood. There was a sort of cross feedback from the stock market to the housing market, and that must account for a good part of the housing boom that we saw.” (99)
Internet Hype in the Millennium Boom:
“[T]he arrival of the Internet in the mid-1990s was interpreted by many casual observers as a fundamental change that would boost the productivity of the economy, since the Internet is a communications and distribution system of fundamental importance. But, if we wish to consider whether the Internet is a communications and distribution system that will produce faster economic growth than in the past, we have to compare it with similar systems of the past, such as those represented by postal services, railroads, telegraph, telephones, automobiles, aircraft, radio, and express highways. All of these networks had profound effects on the economies of their days, helping transform their economies from a much more primitive state. It is
difficult to argue that the Internet is more important to the growth of our economy today than these were to the growth of economies of the past, and so there is no reason to expect faster growth than in the past.” (123-124))
Narratives Are Derived From Stock Market Movements:
"Conventional wisdom interprets the stock market as reacting to new era theories. In fact, it appears that the stock market often creates new era theories, as reporters scramble to justify stock market price moves. The situation reminds one of the Ouija board, where players are encouraged to interpret the meaning of movements in their trembling hands and to distill forecasts from them. Or the stock market is seen as an oracle, issuing mysterious and meaningless pronouncements, which we then ask our leaders to interpret, mistakenly investing their interpretations with authority.” (126)
Productivity Growth is not tightly linked to market gains:
"The statistics on the growth of labor productivity made some impressive gains in the United States in the late 1990s. This helped confirm, in many people’s minds, the advantages that the Internet and other new forms of high technology were offering to the economy, and was seen as justifying the appreciation in the stock market. And yet the high productivity growth in the late 1990s was partly a data error: the U.S. Bureau of Labor Statistics revised the 1998–2000 growth figures substantially downward in 2001, well after the stock market boom.33 Moreover, even to the extent that the productivity growth numbers were good, people read far too much into them. The numbers became a justification for admiring the Internet, when in fact the growth of productivity then had nothing to do with the fledgling new Internet, which was not yet a significant factor in the overall economy. Even beyond this, people didn’t realize how tenuous the historical relation between productivity growth and stock market gains really is.34 Productivity growth hasn’t been a reason to expect the stock market to do well. But the story in the 1990s that the reported productivity growth justified and explained the spectacular stock market appreciation was too good for stock market boosters and the news media to pass up.” (139)
Stocks are not always better than bonds in the long-term:
"The “fact” that Jeremy Siegel pointed out in his book Stocks for the Long Run in 1994, is that in the United States there has been no thirty-year period over which bonds have outperformed stocks. The supposed fact is not really true, since, as Jeremy Siegel himself pointed out in his book, stocks underperformed bonds in the period 1831–61.7 That may seem like a long time ago until one realizes that there have not been that many non-overlapping thirty-year periods in U.S. stock market history: only five such periods since 1861. There have been many overlapping thirty-year periods, but of course these are not independent pieces of evidence. Given the relatively short history of thirty-year periods of stock market returns, we must recognize that there is little evidence that stocks cannot underperform in the future. Siegel himself acknowledges this in the 2014 fifth edition of Stocks for the Long Run, published after the post-2000 correction, which brought more thirty-year intervals of U.S. stock market underperformance. The Moody’s Aaa Corporate Bond Total Return Index outperformed the S&P 500 Total Return Index in thirty-year periods ending in 2010 and 2011." (216)
. . .
Moreover, the United States may itself be the exception rather than the rule in terms of real returns on the stock market. Philippe Jorion and William Goetzmann have studied the real stock market appreciation rates (excluding dividends) for thirty-nine countries for the period 1926–96 and found that the median real appreciation rate was only 0.8% per year for these countries (compared to 4.3% per year for the United States).
"The evidence that stocks will always out-perform bonds over long time intervals simply does not exist. Moreover, even if history supported this view, we should recognize (and at some level most people must recognize) that the future will not necessarily be like the past. For example, it could be that, with investors buoyed by past successes in the stock market, there is now widespread over- investment. Companies may have hatched too many ambitious plans and spent too much on product development and promotion; therefore, they may not do as well as they have in the past. There was indeed substantial over-investment in the 1990s and 2000s, and this was a major factor in the world economic slowdowns starting in 2001 and 2007.
. . .
"So the “fact” of the superiority of stocks over bonds is not a fact at all. The public has not learned a fundamental truth. Instead, their attention has shifted away from some fundamental truths. They seem not to be so attentive to at least one genuine fundamental truth about stocks: that they are residual claims on corporate cash flow, available to stockholders only after everyone else has been paid. Stocks are, therefore, by their very definition, risky." (217)
Don’t throw the baby out with the bubble-bath water:
"Although the precise causal links are hard to disentangle even in these
dramatic episodes, one thing we do know about interest rate policy is that it affects the entire economy in fundamental ways, and that it is not focused exclusively on the speculative bubble it might be used to correct. It is whole-body irradiation, not a surgical laser. Moreover, the genesis of a speculative bubble is a long, slow process, involving gradual changes in people’s thinking. Small changes in interest rates will not have any predictable effect on such thinking—big changes might, but only because they have the potential to exert a devastating impact on the economy as a whole.
"The onset of the Great Depression of the 1930s was in fact substantially due to monetary authorities’ trying to stabilize speculative markets through interest rate policies, although the markets they were focusing on most were not the stock markets but the markets for their own currencies. Countries attempted to preserve the fixed exchange rate system, represented by the gold standard, against attacks. The countries that gave up earliest and abandoned their efforts to defend their currencies were the ones to emerge from the depression the soonest.” (227-228)
Markets are obsessed with conventional future valuation, not true value:
"[Market] participants [try] to buy into their predictions of the conventional valuation of assets in the near future, not the true value.
"A key Keynesian idea is that the valuation of long-term assets is substantially a matter of convention, just as it is with judgments of facial beauty. Whatever price people generally have come to accept as the conventional value, and that is embedded in the collective consciousness, will stick as the true value for a long time, even if the actual returns fail for some time to live up to expectations. If an asset’s returns are carefully tabulated and disappoint for long enough, people will eventually learn to change their views, but it may take the better part of a lifetime. And many assets, such as owner-occupied homes, do not have unambiguously measured returns, and a mistaken “conventional valuation” based on a faulty popular theory can persist indefinitely. The presumed investment advantages of, say, living in an expensive, land-intensive single-family home near a big city, rather than renting a cheaper and more convenient apartment in an urban high-rise, may just not exist, and most people will never figure that out.” (258-259)
davidlz1's review against another edition
4.0
I found this to be a very interesting read. The focus was on behavioral psychology influences rather than the decoupled economics models. He charts events through history and focuses on dispelling classic thoughts for explaining market moves. Very well put together. As an FYI, this is not a 'how to make money' book. Rather it's a counterweight to such writings.
monk888's review against another edition
4.0
Who'd have thought, a few decades ago, that an insightful and socially relevant book could be written on the topic of "bubbles"?
inquiry_from_an_anti_library's review against another edition
challenging
informative
reflective
slow-paced
4.0
phouweling's review against another edition
4.0
Great exposition of the author's claim that the US stock market was a bubble at the time of writing this book (2000). Hence, prof. Shiller predicted the collapse of the dot.com bubble. Very elaborate with lots of evidence and examples. Sometimes a bit too much, but still worthwhile to read on.
anandiyer94's review against another edition
3.0
"Irrational Exuberance" is a book on investor behaviour rather than the statistics of market returns. It beautifully encaptures the market mentality, especially how herd mentality defines the market movements and how word-of-mouth or even media fuels such events. Whatever theory the author advances, supporting data, however, were fragmented at best or non-existent. In most such cases, you would have to take the word of the Nobel-laureate. The timing of the book and its revised editions do lend credibility to the book (Predicting the titular "irrational exuberance" just before the market crash).
The most important aspect is the "lens of behavioural finance" that you might have to wear to wholly appreciate the book. This alone may leave you wiser and more intuitive.
The most important aspect is the "lens of behavioural finance" that you might have to wear to wholly appreciate the book. This alone may leave you wiser and more intuitive.
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