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The Famous Robert Shiller Stock-Market Prediction

Will Robert Shiller be proven wrong about the famous stock-market prediction he made in 1996? Or will be be proven right?

There was a recent thread at the FIRE discussion board (NoFeeBoards.com) in which a poster brought up the famous stock-market prediction made by Robert Shiller (Yale Professor and author of “”Irrational Exuberance”) in 1996. He said that, based on his review of the historical stock-return data available to him in January 1996, “it appears that long run investors should stay out of the market for the next decade.”

Robert Shiller's Bold Stock Prediction The poster suggested that Shiller’s views on the long-term predictability of stock prices have been discredited as a result of the failure of his prediction to come true (presuming that we do not see a big drop in stock prices by the end of this year). I maintain the opposite, that subsequent events back up Robert Shiller’s understanding of what the historical stock-return data tells us more than they discredit it.

The poster is making a fair enough observation in pointing out that the events that Robert Shiller said were coming to pass within 10 years are not likely to come to pass within that time-period. In that sense, Robert Shiller has indeed been proven “wrong” in his prediction.

The 10-year time-frame he put forward was a relatively insignificant aspect of the groundsbreaking message being delivered by Shiller at the time, however. Lots of evidence has accumulated in the past 10 years (including evidence gathered as part of our community’s Great Safe Withdrawal Rate Debate) that backs up the claims made by Robert Shiller far earlier.

Robert Shiller Was More Right Than Wrong

It probably will turn out that Shiller got the 10-year thing wrong. But look at what he got right! Robert Shiller was telling us nearly ten years ago important stuff about what the historical data says re long-term stock performance that the vast majority of investors still do not understand today. And the evidence backing up his arguments just keeps getting stronger and more compelling all the time. I don’t think Robert Shiller has anything to apologize for in guessing wrong just a wee bit as to when the things that the historical data says are going to happen actually do take place.

Robert Shiller’s mistake was in giving a precise date by which he expected to see stock prices fall. Giving short-term stock predictions is generally a fool’s game. Shiller is no fool, of course. My guess as to what happened is that he was trying to give a long-term stock prediction (where the odds of being proven right are good) and instead gave a short-term one (where the odds of looking like a fool are good).

Is 10 years a long time-period or a short time-period for purposes of measuring stock performance? It’s a twilight zone time-period, too long to be considered truly short and too short to be considered truly long. Stock valuations were very high in 1996. Looking at the historical data that existed at the time Shiller made his prediction, I can see why he was led to conclude that it was likely that we would see a big downturn in prices sometime within the next decade.

How Does Robert Shiller Predict the Future?

What caused Shiller’s prediction to go wrong is that we entered uncharted waters in recent years. There is no earlier time-period in the history of the U.S. stock market in which stock prices have remained this high for this long. Robert Shiller was fooled. But he was fooled for the best of reasons. He was fooled because he knows the true meaning of the historical data so well that he realized the great statistical unlikelihood of what has come to pass in the past 10 years.

What Matters and What Doesn’t

Robert Shiller really will be proven wrong on the small point (unless stock prices fall dramatically within the next few months). The important practical point for investors seeking financial freedom early in life, however, is that his groundsbreaking research has been vindicated on the big points. What difference does it really make if it takes 10 years for those who bet too heavily on stocks to regret doing so, or 11 years, or 12 years, or 13 years?

The true buy-and-hold investor is not concerned with whether something happens in Year 10, Year 11, Year 12, or Year 13. He is invested in stocks for the long run. In the long run, Shiller is going to be proven right, if stocks perform in the future anything at all in the way in which they always have performed in the past. That’s what matters.

Stock prices are going to head downward in years to come because they must. The speculative component of the return on stocks has grown too large to be sustainable for the long term. Stock prices are going to move to more moderate levels sometime in the not-too-distant future.

I’m not going to pull a Shiller. I’m not going to say when this is going to happen. But I am confident based on what I know of the message of the historical stock-return data that it is indeed going to happen. I am also confident that Robert Shiller will be recognized in days to come as a pioneer in development of the Valuation-Informed Indexing approach to stock investing (as will William Bernstein, Rob Arnott, Andrew Smithers, Peter Bernstein, Scott Burns, and John Walter Russell).

I doubt whether the investors who listened to Robert Shiller’s words of warning in 1996 are going to regret doing so because those words did not come true until 2007 or 2008 or 2009. My guess is that some of those who ignored Robert Shiller’s warnings may come to see that they are overlooking the forest for the trees in taking comfort that Robert Shiller may be proven wrong on the small point while being proven right on the aspects of the question that matter most.