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Shiller on Investing: ‘Get an Advisor’

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The S&P 500 is up about 0.75% year to date, while the Dow Jones Industrial Average is down about 1.23% as of mid-Friday. After the magnificent returns of 2013, investors and market experts are naturally asking if the market has topped and a correction is beginning.

Jay Jordan of Jordan Co., for instance, told CNBC on Friday that there could be a 25% market decline later this year, when quantitative easing winds down. And investor Seth Klarman of the Baupost Group told his clients earlier this month that we are “mired in a euphoric environment in which some securities have risen in price beyond all reason, where leverage is returning to rainy markets and asset classes, and where caution seems radical and risk-taking the prudent course.”

Looking at the broader roots of bubbles and busts, Yale economist Robert Shiller says there’s much experts can explain and much they can’t. Nonetheless, in an interview posted Friday by the Wall Street Journal, the Nobel Prize winner tells investors they need to work with professionals rather than do it themselves, given the irrational, unpredictable and volatile nature of stock and real estate markets.

When asked about his view on the causes of market bubbles, Shiller explained that they were a very complex beast: “The story about bubbles was that the markets appear random, but that’s only because markets respond to new information and new information is always unpredictable. It seemed to be almost like a mythology to me.”

But that’s only part of the story, he adds. “The idea that people are so optimizing, so calculating and so ready to update their information, that’s true of maybe a tiny fraction of 1% of people. It’s not going to explain the whole market.”

What can? Human nature is a big factor, he says. We need stimulation, “and people have to have some sense of opportunity and excitement,” Shiller said. “I think profits are an important motivator. In the long run, it’s hard to say that bubbles are really bad.”

The alternative, attempting to “fix them” is no easy task, though it may be worth a shot.

“We could have had a Federal Reserve that tried to lean against that [Internet bubble],” he said. “Ultimately, our policies in economics are somewhat intuitive, and our models are not accurate enough to tell us what the right policy is, so I’m thinking we might have been better off if we tamed these bubbles, but there is no way to be sure.”


Ultimately, investors and other market participants move together, whether they intend to or not. “People think of themselves as such original thinkers when, in fact, most of their thoughts have been transmitted to them from other people,” Shiller stressed. “And there are certain stories in circulation, and they are all in all our minds.”

The stories, he adds, are what resonate with us — not rational information like statistics or theory.

“You can still memorize numbers, of course, but you need stories. For example, the financial markets generate tons of numbers — dividends, prices, etc. — but they don’t mean anything to us,” explained Shiller, who is married to a psychologist. “We need either a story or a theory, but stories come first. Most people don’t really get around to much in the way of theory.”

This situation, he says, means investors can benefit greatly from financial advisors.

When asked by if he tells investors they can pick winning stocks or turn to index funds, the economist said, “I tell people to get an investment advisor; that makes sense to me.”

While Shiller thinks some people can invest in winning stocks, he says it is no walk in the park.

“The question is often whether it’s possible for anyone to pick stocks, and I think it is. It’s a competitive game. It’s like some people can play in a chess tournament really well, but I’m not recommending you go into a chess tournament if you are not trained in that, or you will lose,” he explained.

“So for most people, trying to pick among major investments might be a mistake, because it’s an overpopulated market. It’s hard,” he continued. “You have to be realistic about how savvy you are.”

There’s a difference between the financial markets, and real estate, he adds. “But if you are thinking about buying real estate and renting it out, fixing it up and selling it, that’s the kind of market that’s less populated by experts. And for someone who knows the town, that’s doing business, I’m not going to tell someone not to do that,” the economist said.

Sage Advice

As for whether or not he’s good at picking investments, the economist says he has what it takes: a focus on value, not hype.

“Well, I actually think I’m smart enough to pick winners,” Shiller said. “I’ve always believed in value investing. Some stocks just get talked about, and people pay all sorts of attention to them, and everyone wants to invest in them, and they bid the price up and they are no longer a good buy.”

That’s not where the money is, the economist explains: “Other stocks, they are boring. There is no news about them — they are making toilet paper or something like that — and their price gets too low. So as a matter of routine, you buy low-priced stocks and sell high-priced stocks.”

In other words, the exact advice advisors give to clients each and every day.


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