Irrational Exuberance

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Summary: Irrational Exuberance
Review: Robert J. Shiller's "Irrational Exuberance" is about the most bearish book you could ever read about the stock market. Filled with charts and graphs and footnotes of every description, the book--whose title comes from a quote by Alan Greenspan--attacks Wall Street ideas that have become so accepted that they are household sayings. The principal such idea is that securities have always been the best investments over the long run--beating out bonds, foreign currencies, rare stamps, gold and the like. Shiller points out quite a few examples of how market prices, principally the Dow, have remained pretty flat over some periods of 10, 20, 30 years when corrected for inflation. In some circumstances, you might have done better if you put your spare cash in the bank.

Of course the market has been a great place to stash your cash if you got in at the right time--in 1982, for example, at the very start of the longest-running bull market in history. But put your money there now at your own risk. Seventy-two percent of mutual fund managers believe that we're in a speculative bubble now, with the Dow, at 11,000, reaching for figures that far exceed the historic level which would put the rational figure at 6,000. Shiller would not be surprised if the Dow settled in at, say, 10,000--in the year 2020! And what's more, he'd not be astonished if the Dow sank to 6,000 in the near future.

I was convinced after reading Shiller. He has marshalled his facts in a carefully researched screed against following the sheep-like crowds and I have replaced the tens of millions I had invested in common stocks with far more secure, if less exciting, instruments.

Harvey S. Karten [e-mail]

Rating:
Summary: Looking pretty smart right now...
Review: Shiller points out the factors contributing to the biggest bull market in U.S. history, which by now are obvious to nearly everyone. However, if you're in want of technical, quantitative research, you'll be disappointed. Shiller relies on market inefficiency to advance his argument, but makes his case with more "squishy" arguments, and writes at length about behavioral and psychological factors. His concept of a "cascade of information" that contributes to long-term bull or bear trends is especially interesting.

Shiller debunks market efficiency by pointing out that Malkiel, Fama and the rest of the new finance crowd depend on the concept of the rational investor seeking the efficient frontier. Shiller gives us plenty of reason to believe that the majority of investors in the stock market are not rational at all (and often completely idiotic).

Disturbingly, however, Shiller winds up his treatise by taking pity on the fools that were dumb enough to pay $200 for Yahoo! and engages in a rather unbecoming of flailing and hand-wringing about what should be "done" about a stock market bubble. That is, what should the GOVERNMENT do about NASDAQ 5000?

This spoils the book. The answer, clearly, is that the government (Shiller uses the more benign term "public policy) should not care one iota about the stock market in a capitalist system. The fact that the question was even raised left a horrible taste in my mouth and induced me never to buy a Shiller book again.

In any case, it's bound to become a classic for its timing (March 2000) more than any other reason and is certainly worth a read.

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Summary: Kudlow And Cramer Need This Shoved Down Their Throats!!!!!!!
Review: Shiller pursues his uncomplimentary examination of inexperienced investors authoritatively, all the way into their psyches and lapses of reasoning. Introspecting to the CNBC-led, over-hyped carnival sideshow that investing dilapidated into (fall 1999 to March 2000, when the top exploded), all-important valuations were relegated in favor of insane dot-coms, companies with NO business models, not expected to turn profitability until years later, and ever-accursed tech stocks, whose prices were trading profanely overextended. The culprit for investors' sins was financial media; from the most superficial propaganda outlet, ruining investing science into a fad, CNBC, to purportedly "respected" publications, WSJ, to radical, greenhorn publications, the Street.com and Motley Idiot. All sources mentioned had one unrighteous plan in common: the turbulent peddling of speculative garbage like YHOO at $200 without current year earnings to show for, OR shamelessly outright varmint: Pets.com! The culpable media obviously didn't incriminatingly impose people to go underweight in cash, homicidally overweight in tech-but their worst involvement was NEVER raising the alarm to cap Wall Street's mania, angrily opting instead to procure mutual fund talking-heads ruthlessly, to hypnotically fabricate longing, on television!

Discordant factors produced the disreputable herd mentality/behavior that Shiller dissects, striving to overthrow the Efficient Market Theory, which invites debunking. Shiller decidedly reasons the opposite of the Efficient Market Theory. It's unimaginable for persons to actually oppose Shiller's precognition, not because bears the world over were vindicated by equities' bleak performance, but because stocks' P/E ratios are calculated for precisely the reason Shiller alerted: to regulate stocks' unwarranted racketeering. It's fact, that at the bubble's start, techs in the networking and chip sectors were probably outperforming their "old-economy" peers, relating to earnings. Yet since most investors are miserably prepared, they were harshly ensnared by the lax press to pile on to those initially moderate rewards for stocks, to abuse those gains in overstepping ways. Likewise, one could argue that when the Bubble burst-and additional factors like 9/11 and corporate scandals contributing-those same feebly swayed "investors" sold the markets off nightmarishly worse than what was due. Again, because their paranoid nervousness took over their rationale in deciding how to approach markets. I retrospect with ghoulish HORROR, the relentlessness of wrongdoings that Wall Street, the collective body, committed in hazardously presaging themselves for the hardest bear ever.

CNBC, fund managers, analysts blindingly had the blameworthiest ulterior motives to exploit undereducated soccer moms, Sunday investors. Roughly analyzing, the more people CNBC guilefully suckered into longing dangerous techs, the more ratings they'd get, intensifying on-air "personalities"' payoffs, including CNBC's anchors' OWN holdings in various funds they'd get under GE. The more bait fund managers could lure to invest in their funds, the more they'd be compensated for escalating their funds' values. Ever-notorious ANALysts' ulterior motives laid not in the public's response, but in companies' stocks that they covered. Some were paid kickbacks for their suspiciously nothing-but-buy ratings. This triad of terror is accountable for falsely justifying the market's overreaching excesses beyond their, initially, reasonable beginnings. The drone public was simply mistaught that internet stocks' repugnant absence of income would materialize soon enough, networking high-fliers like CSCO and JNPR were said to "never suffer" from lack of business because of ever-expanding business that the growing internet would provide, and that the zombie public could expect profane, double-digit returns for years to come, laxly based on one year's (1999) fluke growth of speculative tech stocks which were preyed upon as a fad.

Also contributing to mania were factors that people mistook to maltreat as reasons for entering markets in a buy-and-hold savagery. As baby-boomers aged, they were unquestionably snared by CNBC's falsenesses to expose themselves supplementary more to equities which were on teetering foundations. The same's true of mutual funds' elevating popularity, as innumerable people were misdirected to blindly trap themselves in funds where they'd never monitor its performance for lengthy times. Other factors were also involved in this worst bear market in 100 years, constituents like 9/11, corporate improprieties, personal bankruptcies-the plausible, defining trigger that blew the markets up (particularly NASDAQ) was people overstretching their margins, thus being extorted to sell automatically. These are hallmark characteristics of hype markets' speculators being so overextended on long sides that when savvy investors decide to take their respective gains from months of abominable gains, selling significantly, margin calls are consequently called in on many accounts. This leads additionally bleakly into the domino effect of tumbling decks of cards.

It's pronounced message still corresponds to today's markets. CNBC's-ONCE AGAIN!!!!-restarting their impenitent Jihad of superficially, abusively embellishing the mediocre point the economy's currently at. Respecting historical bear cycles, we're indisputably in the 4th secular bear since the 20th century, convincingly proven by the damaging downfall of 2000-2002, arduously worse than any declines in the last century, especially the NASDAQ. There may definitively portend 18 years more of this feral bear, from 2000 levels. The shiest estimate of S&P 500's P/E's still sinfully extreme at 30-you'll pay 30 bucks to one dollar of what it's licitly worth, for vast majorities of stocks. Companies repeat slashing jobs-no small part thanks to the newest scourge of outsourcing-at record, breakneck furiousness, with probability of jobs returning to levels markedly improved from the -400 000 that impend awful growth to increments which would traditionally support prosperous GDP higher than 4% ascendingly unlikely. Through this purgatory, and ruthlessly mediocre to pessimistic economic numbers up to the present, aggressively hardened CNBC is unapologetically unlearning from its breaches and refusing to revere their costly errancies. CNBC persists on solely rigging the most obdurate perma-bulls (Angiletas, Leones) and loathsomely irrelevant, corporate Bush Admin. pushers (Kudlow, Cramer) to comment on the last half-year's markets. Those same schemingly prejudiced perma-bulls are seizing control of current market conditions to exaggerate them furiously and depravedly. The increasingly intolerably wretched CNBC "personalities" are debauching to vile, hypocritically "happy" guises while on air, further tyrannizing an air of "great market returns". They're willfully relapsing to 1999-2000's embezzlement, and need to be spurned as Contrarians!!!!

Rating:
Summary: Packed With Knowledge!
Review: Shortly after a briefing by author Robert Shiller, Alan Greenspan warned the country about the "irrational exuberance" pushing stock prices excessively high. The year was 1996 and, in hindsight, it's clear that the bull was just beginning to run. Anyone who heeded that warning would have passed up some of history's most impressive gains. Yet, if history is any guide, stock prices could be in for a 10 or 20 year decline, falling back below the bull market's gains. But Shiller isn't teaching market timing; he's debunking some cherished investing axioms, such as, the belief that stocks are the best long-term investment. He discredits financial reportage, limns to the psychological and emotional factors that make markets behave irrationally and proves that nothing is new about "new economy" prattle. The book is a very effective vaccination against the costly virus of credulity. We [...] suggest this book for every investor's shelf - dog-eared and worn from frequent re-reading.


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Summary: Right on the money 3 years later.
Review: This is a treaty on Behavioral Finance. Shiller makes a strong case that markets are not efficient, but respond to crowd psychology.

Shiller rebuts the Efficient Market Hypothesis. He has analyzed many U.S. stock market crashes. In each case, he did not find information absorbed by institutional and individual investors that justified the market downturns. In all cases, it appears the investors were "aware" of the reasons for the market downturn as explained by the financial press after the downturn occurred. For Shiller, this means that the reasons were false, and that investors do not digest information in such an efficient and immediate way as stated in the Efficient Market Hypothesis.

Shiller believes investors are irrational, and trade based on certain premises such as herd instinct, momentum, belief that stocks always go up. These beliefs are reinforced by the media. The resulting market valuation at the time the book was published (first quarter 2000, the market's peak) was far above its intrinsic value. As they say, the rest is history. Shiller's timing was perfect. We have been in a Bear market ever since.