Speaker 1: This is Masters in Business with Barry Ridholds on Bloomberg Radio. Alright,
Speaker 1: this week we have a very special guest. I'm really
Speaker 1: excited about this, although I'm always really excited about our
Speaker 1: all of our guests. Uh Yale University professor Robert Schiller,
Speaker 1: winner of the Nobel Prize for Economics. He is really
Speaker 1: a fascinating and delightful guy. I'm a huge fan of
Speaker 1: his work. I've been following his writings about markets, about bubbles,
Speaker 1: about investor behavior for really a long time. You know,
Speaker 1: early in my career, I became very interested in investor
Speaker 1: behavior and the cognitive errors that people in general, but
Speaker 1: specifically when we're making risk reward decisions and making bets
Speaker 1: on on markets or bonds or stocks or what have you.
Speaker 1: Those specific errors are quite fascinating. And when I began
Speaker 1: exploring that area, not a lot of people were doing
Speaker 1: serious academic research and writing about it. And and Bob
Speaker 1: Schiller was really one of the first academics to say, hey,
Speaker 1: the math doesn't add up. Markets maybe sort of kinda
Speaker 1: a little efficient, but the numbers aren't there to justify
Speaker 1: this belief that markets are perfectly efficient. In fact, when
Speaker 1: you see the day to day and week to week
Speaker 1: swings looked at against dividends, which are really the ultimate
Speaker 1: payout of of future earnings. The numbers just completely destroy
Speaker 1: the argument that that people are rational, markets are efficient, etcetera.
Speaker 1: So he's really a fascinating guy, not what you would
Speaker 1: expect from an academic. Uh, really down to earth. I've
Speaker 1: been on a number of panels and in media appearances
Speaker 1: with him, and I just always find him to be
Speaker 1: charming and pleasant. I've given him numerous opportunities to throw
Speaker 1: people under the bus, and he refuses to rise to
Speaker 1: the bait each and every time. Uh. If you're familiar
Speaker 1: with his track record, or if you're unfamiliar with his
Speaker 1: track record, he's the guy who published the book A
Speaker 1: Rational Xuberance early in two thousand pretty much marked the
Speaker 1: very top of the market. As if that wasn't enough,
Speaker 1: in two thousand five two thousand six, he warned that
Speaker 1: housing was wildly overvalued and was due for a significant correction.
Speaker 1: Oh and by the way, we should expect that correction
Speaker 1: to have a real negative impact across the economy. He
Speaker 1: was dead right about that, and today he sees markets
Speaker 1: not as quite in bubble territory liked or as as
Speaker 1: bubblicious as we saw housing was in two thousand five,
Speaker 1: two thousand six. But he thinks markets are fairly valued
Speaker 1: and that they could have a couple of years to
Speaker 1: go before we start to run into real, um serious problems.
Speaker 1: So really interesting guy, fascinating curriculum vitae. And still you
Speaker 1: know he really just wants to be a professor. He
Speaker 1: he teaches a class every day. He's been up in
Speaker 1: New Haven at Yale for many years. Really sharp guy,
Speaker 1: very fascinating discussion. Without further ado on my part, here's
Speaker 1: our conversation with Bob Schiller. This is Masters in Business
Speaker 1: with Barry Ridholts on Bloomberg Radio. Today. I have a
Speaker 1: very special guest, our second Nobel Laureate uh Yale, Professor
Speaker 1: Robert Schiller. If you don't know who Professor Schiller is, well, first,
Speaker 1: shame on you. You should. And second, let me give
Speaker 1: you just a brief background on the professor. You've been
Speaker 1: teaching economics at Yale for thirty two quite a while.
Speaker 1: You've written a number of books. One of the most
Speaker 1: famous books was called Irrational Exuberance, which came out in
Speaker 1: the year two thousand, in which you had warned about
Speaker 1: the coming dot com implosion. That wasn't the first time
Speaker 1: you had warned people that things were going to be
Speaker 1: a problem. In two thousand and six, you were describing
Speaker 1: the subprime problem and what it was gonna do for
Speaker 1: housing and said, hey, we're looking at something we haven't
Speaker 1: seen in many, many decades, big drop in housing prices
Speaker 1: and loan behold. I think nationally we saw a thirty
Speaker 1: three percent drop. You're the co creator of the Case
Speaker 1: Schiller Housing Index, with which also measures house prices in
Speaker 1: both cities and metropolitan regions. And and basically you were
Speaker 1: the first to really quantify changes in home prices nationally
Speaker 1: and internationally. And then last year, for all the work
Speaker 1: you've done on behavioral economics and finance, you were the
Speaker 1: recipient of the Nobel Prize, which you actually shared with
Speaker 1: someone else from Yale or am I to know? The
Speaker 1: other two were both from Chicago, Eugene Farmer and Lars
Speaker 1: Peter Hansen. And and we'll save the whole wonky argument
Speaker 1: about Fama versus Schiller in terms of our market sufficient
Speaker 1: or not for a later segment. But Professor Schiller, well,
Speaker 1: welcome to the show. My pleasure. So let's let's get
Speaker 1: into the background of this. You've found your way into
Speaker 1: a field which has become known as behavioral economics or
Speaker 1: behavioral finance, before anyone even knew there was such a thing.
Speaker 1: How did how did that come about? Well? I never know.
Speaker 1: It's uh apparently because actually there are antecedents. I had
Speaker 1: a professor at Michigan, George Katona. He was the guy
Speaker 1: who created the Michigan consumer sentiment indexes, which are still
Speaker 1: widely exited. And when did he create that? That was
Speaker 1: quite a way. Oh yeah, he did his first sentiment
Speaker 1: index in the nineteen fifties, So that was an early
Speaker 1: exposure on your side to consumer sentiment. But nobody had
Speaker 1: ever taken that and really directly applied it to Yeah,
Speaker 1: he was in the psych department and he was all
Speaker 1: by himself. Yeah, I don't know who. It must have
Speaker 1: been someone else, but but no one else was really saying, hey,
Speaker 1: let's look at the psychology of consumers to see how
Speaker 1: what they're feeling and saying effects their behavior in terms
Speaker 1: of spending and retail sales. Well, there weren't academic so
Speaker 1: there weren't scientifically there must have been people talking about
Speaker 1: psychology they've always talked about it. But the idea of
Speaker 1: systematized you know, it was in the early sixties that
Speaker 1: the Chris tape came, so you could use a computer
Speaker 1: and you could process an analysis of stock prices, and
Speaker 1: that kind of dominated thought. From nineteen sixty two almost nine.
Speaker 1: They were finding that markets looked efficient. That was the
Speaker 1: general tenor so. The whole idea that you could beat
Speaker 1: the market, at least among academic types was considered discredited,
Speaker 1: and so they weren't interested in psychology. There was no
Speaker 1: psychology in this frame of thinking in the markets. And
Speaker 1: yet when you look at the behavior of markets in actuality,
Speaker 1: you have giant booms, you have bubbles, you have terrible
Speaker 1: busts and crashes. You know, in seven the Dow lost
Speaker 1: in one day. How efficient is a market? Then on
Speaker 1: one day it's worth a hundred and then the next
Speaker 1: day it's worth seventy seven, and both of those prices
Speaker 1: are actually valid according to that sort of approach. How
Speaker 1: does that make any sense? Well, you're referring to October
Speaker 1: nine seven, when, as you say, the market made a
Speaker 1: historic one day dropped and efficient markets. People would say
Speaker 1: there must have been news that the problem is, no
Speaker 1: one could come up with what the news was, and
Speaker 1: so it started to sound funny. I did a study
Speaker 1: of that event, but my way of studying it was
Speaker 1: totally out of fashion. I did a questionnaire survey. Now
Speaker 1: most no one else did that until later there was
Speaker 1: this Brady Commission that did a survey. But you know,
Speaker 1: the economists have gotten into the frame of mind that
Speaker 1: there's no point in asking people why they bought or
Speaker 1: sold because they lie. They make up stories, nationalized, they
Speaker 1: lie to themselves. They don't know they're lying. This looks
Speaker 1: like psychology, which is just disreputable. In the econ department,
Speaker 1: I found that whenever you talked to people who were
Speaker 1: bullet the question to always ask is, so what's your
Speaker 1: investment posture? Oh, I'm fully invested, I'm long my own
Speaker 1: lots of equities. And whenever you talk to people who
Speaker 1: are bearish, it's always, oh, I'm out of stocks. I
Speaker 1: don't want to have any exposure. It seems that the
Speaker 1: way we define ourselves is rationalizing the prior decision, right.
Speaker 1: That's called cognitive dissonance. That's so so we end up
Speaker 1: with participants in markets who don't really seem to know
Speaker 1: why they're doing what they're doing, but they're constantly rationalizing
Speaker 1: uh that process to themselves. Right. Well, they these are
Speaker 1: ring bells that psychologists have explored. So justification bias, which
Speaker 1: is something that Knomen and others have studied, people uh
Speaker 1: will feel they have to justify things there their self
Speaker 1: respect even when they're justifying to them selves, and so
Speaker 1: they tend to follow naive rules and they tend to
Speaker 1: do the same thing that they've done before. As you
Speaker 1: were saying today, my special guest in the studio is
Speaker 1: Yale Professor of Economics Robert Schiller, winner last year of
Speaker 1: the uh Rivsking Award for Risk Bank Award. It's this
Speaker 1: technically not a Nobel for economics, but it comes from
Speaker 1: the right. They don't make up their mind what to
Speaker 1: call it, so all these different names that they use
Speaker 1: it at the Nobel Foundation, So we could just go
Speaker 1: with the Nobel Prize in Economics and yeah, that's that's
Speaker 1: good enough. Shorthand. So the segment, this segment, what I
Speaker 1: really want to discuss with you are the booms and
Speaker 1: busts that it seems every market has gone through. We
Speaker 1: had the dot com boom and bust, We had the
Speaker 1: housing boom and bust. Lately, gold seems to be in
Speaker 1: the midst of imploding as we're speaking. It's in the
Speaker 1: eleven hundreds. It was nineteen hundred dollars not too long ago.
Speaker 1: It's lost about its value. Is this the fate of humanity?
Speaker 1: That there are always gonna be booms and busts, that
Speaker 1: were always going to have bubbles? Ah, good point, I
Speaker 1: h Let me say in my Nobel lecture which I
Speaker 1: gave on that occasion, I tried to point out that
Speaker 1: efficient markets is actually the theory actually has some value.
Speaker 1: It's a half truth. So let's not go to extreme right,
Speaker 1: Maybe it would be more fun if we went to extremes,
Speaker 1: but price movements and markets often do reflect real news.
Speaker 1: The point is that sometimes they don't, and so it's
Speaker 1: not the pure efficient markets theory is not quite right.
Speaker 1: So when we look back at this past decade, we've had,
Speaker 1: we had a dot, We've had it seems every few
Speaker 1: years we've had a major bubble. Why is it that
Speaker 1: human beings succumbed to this sort of activity in capital markets? Well,
Speaker 1: people succumbed to this sort of thing outside of capital
Speaker 1: markets too. It's called fashions. And fads. Henry Fielding said,
Speaker 1: fashion is the great governor of this world. It's true.
Speaker 1: We're you know, so much like the way we're dressed
Speaker 1: and the laser your suit and tie. Yeah, I look
Speaker 1: very conventional here, right, it's all dictated gray flannel overcoat
Speaker 1: and this is the sort of stuff. So because so
Speaker 1: in other words, it's the crowd. It's because peer pressure.
Speaker 1: Everybody else dresses this way. So is that how the
Speaker 1: investors behave? Yeah, and no, there's no problem in doing
Speaker 1: what everyone else does in dress, doesn't matter. But if
Speaker 1: you do what everyone else does in investing, you'll just
Speaker 1: have the market return if you're lucky. Some of the
Speaker 1: studies we've seen have said that the average investor isn't
Speaker 1: even forget alpha, they're not even generating beta, they're not
Speaker 1: even obtaining market returns. So how how significant is investor
Speaker 1: behavior to those sorts of bad returns. Well, then people
Speaker 1: are vulnerable to sales tactics, and they might buy into
Speaker 1: some investment fund that has a very high management fee,
Speaker 1: uh which they were sold on it, and they fall
Speaker 1: victim to tricks like incubator funds that you know, you
Speaker 1: try to start a number of funds and one of
Speaker 1: them is going to do well by chance, and you
Speaker 1: start promoting that one. There was an old joke many
Speaker 1: years ago that you could send out the back in
Speaker 1: the day when newsletter writers were popular. You send out
Speaker 1: ten thousand pieces of mail, and you pick a stock,
Speaker 1: and one piece of mail says, this stock is the
Speaker 1: greatest things, and slice bread. It's our next pick. You
Speaker 1: have to own it. And the other five thousand pieces
Speaker 1: of mail say this is a terrible stock. You want
Speaker 1: nothing to do with it. And then whichever half is right,
Speaker 1: that's how you market the next the next letter two,
Speaker 1: and people like, well, they were so right the last time,
Speaker 1: So it's very easy for us to be fooled. I'm
Speaker 1: speaking with Yale professor Robert Schiller discussing booms and bus
Speaker 1: Let's talk a little bit about irrational exuberance, a phrase
Speaker 1: that was made famous in by Alan Greenspan, which I
Speaker 1: think many of our listeners will be familiar with. Green
Speaker 1: Spans irrational exuberant speech. What I bet most people don't
Speaker 1: know is that you're the guy who briefed him before
Speaker 1: that speech, and that was essentially your phrase that he
Speaker 1: incorporated into his um his speech. Is that is that
Speaker 1: more or less accurate. Well, I know that. I I've
Speaker 1: met with the whole Federal Reserve Board with my co
Speaker 1: author John Campbell three days before that speech, and we
Speaker 1: were saying the market was the irrational, But I don't
Speaker 1: think I probably used the word irrational exurbance. So that
Speaker 1: was his own phrase. Well, it wasn't exactly his own.
Speaker 1: It was already around but not used. But we know
Speaker 1: what really made it famous was not the fact that
Speaker 1: he used it. It was that markets all over the
Speaker 1: world dropped sharply as soon as he I believe the
Speaker 1: Japanese markets were open when he gave his speech, the
Speaker 1: U S markets were closed. They just dropped immediately, and people,
Speaker 1: what's going on here? Why would the Japanese market Well,
Speaker 1: you know, people in Japan were listening to his speech
Speaker 1: and they must have put it out on the news,
Speaker 1: and that was the basis of the full and the nick. Yeah,
Speaker 1: it was so absurd that he just uttered these words
Speaker 1: irrational and he mentioned Japan in the same sentence. And
Speaker 1: now everybody forgets back in the late nineties, green Span
Speaker 1: was the man. He was moving markets. Since then, we've
Speaker 1: had a little bit of reputational damaged thanks to the
Speaker 1: most recent financial crisis. Today, my guest in the studio
Speaker 1: OH is Professor Robert Schiller of Yale, winner of the
Speaker 1: Nobel Prize in Economics. In and earlier we were discussing housing.
Speaker 1: Let's have a little more detailed conversation about that. So
Speaker 1: you were the co creator of the Case Shiller Housing Index.
Speaker 1: Prior to that, there really wasn't a reliable set of
Speaker 1: national data that compiles all the different metropolitan and regional
Speaker 1: housing markets. Is that? Is that correct? We had? Well,
Speaker 1: it's interesting there were no price indexes at all until
Speaker 1: around the nineteen sixties. Strange because people had the Dow
Speaker 1: and there was none. Then the National Association of Realtory
Speaker 1: I think they had a different name. Then UH created
Speaker 1: the Media and Home Price and they published it. It
Speaker 1: was kind of intermittent. Some months they'd missed and it
Speaker 1: was very jumpy. Then the sense, I don't know if
Speaker 1: you wanted all that. There was a new home price
Speaker 1: index that Census published, but it didn't track existing homes.
Speaker 1: It wasn't you know what what we Case and I developed.
Speaker 1: We wanted to at Wellesley College. We wanted a tradeable index.
Speaker 1: We believed in markets for indexes so we wanted an
Speaker 1: index that represented the investment value of a existence, so
Speaker 1: to repeat sales indere like a stock market index. It
Speaker 1: shows the changes in the index reflect changes in prices
Speaker 1: of homes, not the change in the mix of homes
Speaker 1: that are sold. Right, So every year the NR every
Speaker 1: month the NUR data. That's a different set of houses sold,
Speaker 1: different every month. You guys try to focus on a
Speaker 1: region and make it look more like you're trading a
Speaker 1: given house, given group of houses. So we were the
Speaker 1: first to publish a home price index that is like
Speaker 1: a stock price index. And that's been around for how
Speaker 1: long now, since the late eighties, and it was eventually
Speaker 1: sold to S and P. It's complicated. We so that
Speaker 1: the five service service, so that the core logic core
Speaker 1: Logic has a deal with SMP. It's kind of, you know,
Speaker 1: the way the world works, never never simple. So then
Speaker 1: in two thousand three you had an interesting paper at
Speaker 1: I think it was Brookings. Is that right? Is there
Speaker 1: a bubble brewing in the housing market? So tell us
Speaker 1: a little bit about that. What did you see an
Speaker 1: oh three, long before anybody else was talking about um
Speaker 1: housing bubbles? What caught your eye that made you author
Speaker 1: a paper three years before the market peaked and said, hey,
Speaker 1: this is a potential problem. Well, one thing is, we
Speaker 1: did a questionnaire survey of homebuyers and asked them what
Speaker 1: they thought home prices would do for the next ten years,
Speaker 1: and we got extravagantly high expectations. People thought, uh, something
Speaker 1: like ten percent a year increasing for ten years, so
Speaker 1: the houses will double every seven or so after already
Speaker 1: reaching record high levels. Uh and uh. We we asked
Speaker 1: about you know, general people thought housing was the great investment.
Speaker 1: They were a little annoyed with the stock market in
Speaker 1: two thousand three because they had bottomed out and they
Speaker 1: had a bubble burst, and they would write things on
Speaker 1: the questionnaires they right. I am really angry with my broker.
Speaker 1: He he told me all these finance guys are a
Speaker 1: bunch of crooks. I want to buy a house something
Speaker 1: that I can see and believe. I know it's real.
Speaker 1: I'm sitting in it, I can watch it all the time.
Speaker 1: And that just became an attitude that drove, and then
Speaker 1: home prices got increased that record pace. The price to
Speaker 1: rent ratio went up, the price too, personal income racial
Speaker 1: went up to record levels. Uh. Price to GDP home
Speaker 1: home valuation GDP. All three metrics had just gone three
Speaker 1: standard deviations away from the historically they went completely vertical.
Speaker 1: And one of the studies that you had written, and
Speaker 1: I don't remember if it was the three study, said
Speaker 1: that over a hundred years. Here's something that people are
Speaker 1: always astonished when I tell them this. How much of
Speaker 1: a return has a home generated net of inflation over
Speaker 1: the past century. What are the numbers? Well, this is
Speaker 1: what I published in two thousand five in the second
Speaker 1: edition of Irrational Exuberance. In real terms from eighteen ninety
Speaker 1: to nine, there was almost no change in real home prices. So,
Speaker 1: in other words, after once you back out inflation, home
Speaker 1: prices were flat for a century century for a century.
Speaker 1: Now that does that include the tax real estate taxes
Speaker 1: you pay the maintenance. So effectively, all of us who
Speaker 1: have big houses that we pay a lot of maintenance
Speaker 1: and costs for this is a money loser unless you
Speaker 1: like the house. Yeah, if you got to live somewhere.
Speaker 1: For a lot of people, it's a form of force
Speaker 1: savings because they have to pay their more page down
Speaker 1: each month. And if they are not irrational. When it
Speaker 1: comes to home equity loans, thirty years later, they have
Speaker 1: a house and they have no obligation. That's another thing
Speaker 1: that was happening during the bubble. There were these home
Speaker 1: equity loans were proliferating. People were borrowing against How is
Speaker 1: it they buy a second house, some of them using
Speaker 1: the first houses as collateral. I'm Barry rid Helps. You're
Speaker 1: listening to Masters in Business on Bloomberg Radio. Our guest
Speaker 1: today is the great Robert Chiller of Yale University, winner
Speaker 1: of the Prize in Economics, creator of the Case Schiller Index,
Speaker 1: creator of the Cape measure, which we'll get into, and
Speaker 1: relentless um popper of bubbles. You've been pretty good identifying
Speaker 1: when markets are in a bubble. You did it in
Speaker 1: two thousand with the dot coms, you did it in
Speaker 1: oh six with housing. What do we see as a
Speaker 1: bubble today? What? What's got You have to come up
Speaker 1: with another one? Well, I don't know. The stock market
Speaker 1: looks highly priced, the bond market looks highly priced. The
Speaker 1: housing market is going up. Um, these are good times
Speaker 1: for booms. So this is a boom and the question
Speaker 1: has win will it end? I wish I were better
Speaker 1: at doing that. You know, I don't get the sense
Speaker 1: that you perceive the market now. I think we will
Speaker 1: agree stocks are at least fully valued, if not pricing.
Speaker 1: Bonds are pretty fully valued if not pricing. I don't
Speaker 1: know if houses I would not highly priced, but not
Speaker 1: that's where I was going going They have been going well,
Speaker 1: maybe not in the last few months. But I don't
Speaker 1: sense the same sort of warning from you today in
Speaker 1: that I heard from you in two thousand six about
Speaker 1: housing or two thousand about stocks. This feels like so
Speaker 1: we still have We know that these cycles always end badly.
Speaker 1: We know there's always a bear market down the road,
Speaker 1: but it seems like you're saying this could run a
Speaker 1: few more years. So we're not at the level where,
Speaker 1: oh my god, this is crazy. It's really Hey, things
Speaker 1: are a little a little pricey. That doesn't mean they
Speaker 1: can't get even more pricey. I really wish I could.
Speaker 1: I keep trying to predict turning points, huh, And I've
Speaker 1: been doing questionnaire surveys. You can find them on our website.
Speaker 1: I give these away. The problem is that it just
Speaker 1: can't make any sense out of them. I'm peeping to try.
Speaker 1: Maybe I'll have I'll share when we're done, I'll share
Speaker 1: some sense out of them. We we figured out the secret.
Speaker 1: I'll share with you later. It's a quantitative trick. I
Speaker 1: don't want to say it over the radio, but i'll
Speaker 1: that'll be the next, the next Nobel. It's a simple
Speaker 1: moving average, and that's usually the um. So let's talk
Speaker 1: a little bit about Since we mentioned the Nobel, let's
Speaker 1: talk about you and professor Fama. He's at your Yale,
Speaker 1: he's at Chicago. I always thought that you guys had
Speaker 1: too very different philosophies, and I thought your philosophy complimented his.
Speaker 1: So let me just set this up in a nutshell.
Speaker 1: Eugene Fama essentially says markets are, if not perfectly efficient,
Speaker 1: then very efficient. That price and then what that means
Speaker 1: in English is prices reflect all the available knowledge that's
Speaker 1: out there, and so don't even try to beat the market.
Speaker 1: It's almost impossible. You're better off just buying a passive
Speaker 1: index and and forgetting about it. And Fama famously inspired
Speaker 1: John Bogel, who went on to form Vanguard, which is
Speaker 1: now managing three trillion dollars, of which two trillion is
Speaker 1: in all passive indexes. So as an academic, my experience
Speaker 1: has been most academics don't necessarily disagree with that as
Speaker 1: an investment strategy. Is that a fair statement brought passive intentions? Yeah,
Speaker 1: it's a question of degree. If you're talking to someone
Speaker 1: who is not really likely to be that interested or
Speaker 1: attentive to what he or she is doing, of course
Speaker 1: you don't tell them to try to beat the market.
Speaker 1: It's a it's a game that smart people can beat on,
Speaker 1: and so you're not gonna win. It's like, don't go
Speaker 1: into the gambling casino and play poker with your life
Speaker 1: savings either to lose. So uh. But I think the
Speaker 1: other question is whether some people who try hard and
Speaker 1: who are smart and organized, whether they can beat the market.
Speaker 1: And I think the answer is yes, although maybe not
Speaker 1: as dramatically as you hoped, but yes, they're very rare,
Speaker 1: the warm buffets of the world and the dramatic right,
Speaker 1: the guys who have have put up market beating them. Now,
Speaker 1: some of the efficient market people say, well, that's just random.
Speaker 1: But I don't. I don't get the sense you agree
Speaker 1: with that. No, I think at people who try hard
Speaker 1: have business sense, and you know it's work. I don't. Yes,
Speaker 1: it's not necessarily fun. I think you know lots of Uh,
Speaker 1: it's not intrinsically rewarding unless you have a certain urge
Speaker 1: to do that sort of thing. Some people love it,
Speaker 1: you know, so maybe that's great for them. Most of
Speaker 1: us would rather do something else, right, as opposed to
Speaker 1: being handcuffed to a terminal and watching the market take
Speaker 1: by tick day by day. There are people who have
Speaker 1: demonstrated the ability to outpulform the market doing that, but
Speaker 1: you're right, it's a lot of work. It's it's and
Speaker 1: then and then they can the last twenty years of
Speaker 1: their life might be a failure, even though because you know,
Speaker 1: it's not just people, that's their theories and their ideas,
Speaker 1: and the market can just work against some theory that
Speaker 1: was right. We'll be right again, but maybe not for
Speaker 1: the rest of your life. So these things come into
Speaker 1: and out of fashion. As as you said earlier, that's
Speaker 1: the problem. So you know, I'm I'm a professor, not
Speaker 1: a professional investor. Somehow going into that field seem a
Speaker 1: little bit It would give me ulcers if I went
Speaker 1: into that as my full time job. Well, you have
Speaker 1: to you have to learn to accept that you can't
Speaker 1: control what the market is going to do and as
Speaker 1: soon as you accept the market goes up and down
Speaker 1: and I can't control it. The ulcers go away. Some
Speaker 1: people never get to that phase of hey, listen, sometimes
Speaker 1: it rains. I just have to remember to bring an
Speaker 1: umbrella and not blame yourself. That that's exactly that's exactly right.
Speaker 1: I'm speaking with Robert Schiller of Yale University. So let's
Speaker 1: get back to the efficient market hypothesis. So on the
Speaker 1: one hand, Fama is this efficient market guy. On the
Speaker 1: other hand, he's at the what's now known as the
Speaker 1: Booth School, and at the time there is an anomaly
Speaker 1: that these small cap stocks and these value stocks seem
Speaker 1: to do better than the rest of the market, which
Speaker 1: is a little funny because no one's supposed to be
Speaker 1: able to outperform the market. But yet he becomes an
Speaker 1: advisor to a company that tries to beat the market
Speaker 1: on a regular basis. They don't use the word beat
Speaker 1: the market, So what phrase do they use? I have
Speaker 1: it exactly, But it's something about identifying risk factors. So
Speaker 1: there's a value risk factor. So in other words, you're
Speaker 1: getting a greater reward for the capital you put at risk.
Speaker 1: Is that right? And that there might be a rational
Speaker 1: reason why one would need to be compensated. It might
Speaker 1: correlate with something you're doing, or some tale risk that
Speaker 1: you have in mind that you don't see in the data.
Speaker 1: But it's important. These are kind of hypotheticals and he
Speaker 1: so he wants to uh, he has faith in the
Speaker 1: rationality of the market that he wants to say that
Speaker 1: you can't prove why these fluctuate why value stocks. I
Speaker 1: shouldn't say that I can exactly what he would say,
Speaker 1: but it has that quality too, And and your approach
Speaker 1: is different. Your approaches. Hey, humans aren't especially rational, and
Speaker 1: in a crowd, they are occasionally very irrational. And hence
Speaker 1: these humans and by crowd, it could be a stock market,
Speaker 1: it could be any sort of market for goods and services,
Speaker 1: and that's how prices go so wildly out of whack. Yeah. Now,
Speaker 1: I think Farma is a brilliant man. Actually I admire him.
Speaker 1: But you know, a brilliance comes with slants or views
Speaker 1: as well. And that's that's all it was, you know,
Speaker 1: when it comes down to I talked to him about fact.
Speaker 1: We kind of agree on the fact on the objective
Speaker 1: statistics of the market. So um, so you've viewed forecast
Speaker 1: a ball. You know, as Farmer would say, the fact
Speaker 1: that it's somewhat forecasting ball doesn't mean it's inefficient. His
Speaker 1: Nobel lecture was called two Pillars of financial modeling. The
Speaker 1: one pillar is market efficiency, the basic notion. But the
Speaker 1: other pillar is you have to say, well, what should
Speaker 1: an efficient market look like? And it could be a
Speaker 1: little bit forecast herble. So so the two of you
Speaker 1: share a Nobel prize with the third person who's a
Speaker 1: statistician at Chicago and doesn't philosophically. He's really more about
Speaker 1: the mechanics of of crunching numbers, whereas you and Fama
Speaker 1: are philosophically very much I don't want to say polar opposites,
Speaker 1: but you look at the market very very differently. Well,
Speaker 1: I believe in broader social science. I believe in psychology, sociology,
Speaker 1: political science. They all matter. When you wonder why is
Speaker 1: the market growing up and down? You have to think
Speaker 1: in terms of those broader disciplines. That there's a ten
Speaker 1: for economists to dismiss these people, and I think that's
Speaker 1: a big mistake. So early in your career you had
Speaker 1: a paper you published, do stock prices move too much
Speaker 1: to justify subsequent changes in dividends. So explain how you
Speaker 1: looked at dividends as a way to decide that, hey,
Speaker 1: this market isn't really all that efficient after all. Well,
Speaker 1: people often forget that ultimately the value in stocks comes
Speaker 1: from the dividends they pay. If there were ever a
Speaker 1: company that the government said we're putting a special tax
Speaker 1: on you. We're gonna tax your dividends forever the company,
Speaker 1: the stock would be worthless because it's only value comes
Speaker 1: from the dividends. What about companies like Amazon that have
Speaker 1: no dividend but in the future. So that's the expectation.
Speaker 1: Is you're buying a pricing stock now that one day
Speaker 1: is going to have a big dividend. That's right. So
Speaker 1: that's the lure. This is the podcast portion of our interview.
Speaker 1: By now you've heard the first hour of the radio interview,
Speaker 1: which goes by. I told you it goes by like that, right,
Speaker 1: It's it's so quick. Um, So I have you in
Speaker 1: the studio for a little while longer before we have
Speaker 1: to take you to your next um presentation. I know
Speaker 1: you're honoring a colleague from Columbia, and there's a handful
Speaker 1: of things we didn't get to. I definitely wanted to
Speaker 1: talk about first before I forget. You now have an
Speaker 1: online economics course? What what is that called? Financial markets? Yeah?
Speaker 1: And and how can somebody access this? Well, first of all,
Speaker 1: it's free unless you want a certificate. You can pay
Speaker 1: for the certificate, but it's a free course on Coursera.
Speaker 1: Started a couple of weeks ago and it's running until December.
Speaker 1: You can sign up any time for free and you
Speaker 1: can participate. And then we have now Coursera is a
Speaker 1: group joint venture of a couple of different schools or
Speaker 1: it's of course Sarah is a company uh that involves
Speaker 1: a number of universities offering some l M I T Stanford, Harvard,
Speaker 1: There's a whole list of really highly regarded schools. Yeah,
Speaker 1: there's a lot of courses that you can take for free,
Speaker 1: for free. It's it's it's a very so it's like
Speaker 1: going to Yale taking a course with Bob Schiller, but
Speaker 1: without paying fifty your tuition. Yes. And the other thing
Speaker 1: is you don't really uh see me directly. You see
Speaker 1: me on the TV. There's there's I think close to
Speaker 1: forty students in my class right who signed up and
Speaker 1: maybe they're not showing up. And we know that the
Speaker 1: online courses there's a big drop off when when over
Speaker 1: the course of time. But you know, so they don't
Speaker 1: get to go to the front of the class and
Speaker 1: ask you questions when the lectures over. But this is
Speaker 1: the same sort of lecture you give. Yeah, it's the same.
Speaker 1: Last time I did this, I had We graduated eight
Speaker 1: thousand with a final exam. We gave a certificate and
Speaker 1: we failed three fifty. I'm sorry, I feel bad about that.
Speaker 1: But you have to take a final exam. It's it's
Speaker 1: essay or multiple choice. It's multiple choice. Okay, well it's
Speaker 1: computer graded. I'm not grading, you know, so you're not
Speaker 1: gonna do eight thousand essays for free. And then at
Speaker 1: the office hours. Uh, students can send in questions. We
Speaker 1: just had one the other day. Uh. And how similar
Speaker 1: is this course to you know, a Yale Economics one
Speaker 1: on one course. Well, it's a little bit shorter. We
Speaker 1: trimmed it down, but it's it's based it's based on
Speaker 1: actual lectures I gave to my class. So this is
Speaker 1: if someone were to say, Gee, I didn't get into Yale,
Speaker 1: but I'd like to take Bob Show's economics course. This
Speaker 1: is actually something they could do and it's no charge.
Speaker 1: I think this is a revolution for the future. I
Speaker 1: don't know where colleges are going as this becomes more
Speaker 1: and more con academy and they even meet each other
Speaker 1: our students, Uh, they meet ups, they can blog each other,
Speaker 1: they have meetups. So kin Academy is something that started
Speaker 1: doing this to teach math, and now they've added dozens
Speaker 1: of subjects. You think that this is something that is
Speaker 1: a a change in society. This is a tech. That's
Speaker 1: a question that that we we have to wait and see.
Speaker 1: I actually like to have real people in the classroom.
Speaker 1: I think people want to get to know their professor,
Speaker 1: which you really can't do or I can't get to
Speaker 1: know them when there's so many of them, for sure,
Speaker 1: not not when there's eight thousand sign ups. Um, that's
Speaker 1: an interesting technology. What what other technologies I'm a gadget head.
Speaker 1: I know you have a smartphone. What other technologies impress
Speaker 1: you or interest you or do you think might be
Speaker 1: leading to societal changes? Oh, well, there are big changes coming. Uh.
Speaker 1: We were talking about the diet pill earlier. The problem is,
Speaker 1: are we and lots of people have written about this.
Speaker 1: Uh uh are are we arriving at a new society
Speaker 1: where there aren't jobs for most people? You know, it
Speaker 1: used to be you could get a PhD. And if
Speaker 1: you couldn't get a job, you could drive a taxi.
Speaker 1: But it's coming. We're gonna have driverless taxis before long,
Speaker 1: not not too far. Used to be a taxi driver,
Speaker 1: you used to have to know something, You have to
Speaker 1: know your way around the city. Now they just plug
Speaker 1: in GPS, and so we're gonna eliminate the driver completely.
Speaker 1: And the question is where is this going? Young people
Speaker 1: today have say fifty or more years ahead of earning years.
Speaker 1: What are they going to look like? What are their
Speaker 1: jobs gonna look like in fifty years? It's frightening. So
Speaker 1: what about something that's less frightening. Earlier we were talking
Speaker 1: about a diet pill that you go to the Midwestern America.
Speaker 1: Even you go to Europe now, which used to make
Speaker 1: fun of us fat Americans. Europeans are now giant and bloated.
Speaker 1: What what did you mention you thought was happening on
Speaker 1: that side? I was thinking that I don't know. I'm
Speaker 1: not a drug expert, but I think I wouldn't be
Speaker 1: at all surprised if in ten years they'll have a
Speaker 1: diet pill that not only works, but they'll tell you
Speaker 1: it will improve your longevity if you take it. They'll
Speaker 1: say it's good for you, you better take it, and
Speaker 1: there won't be fat people anymore. So you think technologies
Speaker 1: and and biotechnologies eventually going to eradicate controlling appetite. There
Speaker 1: is this lepton hormone they discovered and they thought that
Speaker 1: was it, but it turned out not to work. But
Speaker 1: we'll find that's the famine mode. We were talking about
Speaker 1: that earlier, that you could suppress that, but then your
Speaker 1: body starts to think you're in there's no food, you're
Speaker 1: in famine mode, and it tries to hoard calories and
Speaker 1: not lose them. So it's a matter of eventually figuring
Speaker 1: out the biochemistry. It's just this will be a bigger
Speaker 1: revolution than the birth control to really so now it
Speaker 1: was the only thing there They tell women take it
Speaker 1: because it will make it actually reduces your risks. That's
Speaker 1: really interesting. So the technology, so here's what we're gonna have.
Speaker 1: We're gonna have people living longer but making less money.
Speaker 1: Who's gonna who's gonna pay for this. You you got me,
Speaker 1: And so we have no answer to Well, the only
Speaker 1: answer that I've been giving in my books is that
Speaker 1: we should think about the computer generated inequality that might
Speaker 1: come in the future, and let's make plans now how
Speaker 1: we're going to deal with it, don't wait until it happens.
Speaker 1: And so the plans could take various forms. One of
Speaker 1: them is risk management. We could put people in risk
Speaker 1: management contract. It would be an insurance variety. Another one
Speaker 1: is a plan to raise taxes on the rich. I
Speaker 1: mean not to I'm not saying to make everyone equal,
Speaker 1: just to respond to exceptionally increase inequality if it happens.
Speaker 1: If it happens now, by a lot of measures, inequality
Speaker 1: in America today is at the widest levels since the
Speaker 1: nineteen twenties. Um, do you think that if we continue
Speaker 1: to see things move along the path that they they are,
Speaker 1: and if technology continues and globalization and other factors continue
Speaker 1: to make getting a job more challenging, is that going
Speaker 1: to get better or is that going to get worse? Well,
Speaker 1: nobody knows it could get better. It could be that
Speaker 1: it generates jobs. Uh so Uh. For example, the people
Speaker 1: talk about musicians They say the invention of communications technology
Speaker 1: created a winner take all effect that only the only
Speaker 1: the very best singers would who could make records or
Speaker 1: c d s would would survive. But it seems to
Speaker 1: be going in another direct and that now the the
Speaker 1: communications technology allows so many different types of music to
Speaker 1: flourish that it's kind of creating more jobs for and
Speaker 1: then people will hear some of them and then they
Speaker 1: want to hire the person for their wedding or something
Speaker 1: like that. It used to be that musicians would tour
Speaker 1: in order to promote the sale of their album. Now,
Speaker 1: the way the cost structures have changed, they release an
Speaker 1: album in order to go out to promote the tour.
Speaker 1: The way the record companies set up their contracts, these guys,
Speaker 1: unless they're selling a million copies, they're not making a
Speaker 1: lot of money. But when they go on tour, if
Speaker 1: they run it lean and smart, that's where they're making
Speaker 1: money today. So you're saying, we don't and everything else
Speaker 1: is changing, that we really don't know the future. That's
Speaker 1: the scary thing. And and since we don't this, you know,
Speaker 1: we're talking finance here. Finance and insurance are really about
Speaker 1: an un certain future. It's about managing it, sharing your risks,
Speaker 1: hedging your risks. People forget that that that's a core element.
Speaker 1: It's not about beating the market necessarily. It's about managing
Speaker 1: risks in such a way that you can be a
Speaker 1: productive society and we can achieve our yours. Now that
Speaker 1: sounds eminently reasonable, and yet we seem to overlook it.
Speaker 1: So I'm going to repeat what you just said. The
Speaker 1: future is unknowable. There are risks inherent to that. It's
Speaker 1: our responsibility to manage those risks, and how successfull we
Speaker 1: manage those risks will determine how successful we are. Financial
Speaker 1: is Is that a fair restatement? This is what This
Speaker 1: is one of the messages that my financial markets course.
Speaker 1: There's an important technology that finance represents, and it's a
Speaker 1: technology of financing activities and doing it in such a
Speaker 1: way that people can undertake activities that would have been
Speaker 1: too risky for um. They can they can take you
Speaker 1: know you you venture capitalists will support a young firm
Speaker 1: whose probability of succeeding might be uh, but it's not
Speaker 1: going to be devastating because they'll spread that risk guard
Speaker 1: over many investors. So you make thirty or forty investments
Speaker 1: into the winners. The big winners pay for all those losers.
Speaker 1: And that's a form of risk management, and that's what
Speaker 1: our civilization is built on. We're doing amazing things. Uh
Speaker 1: so we have cures for diseases. Pharmaceuticals. People who try
Speaker 1: to develop new drugs have a notorious failure record, but
Speaker 1: a few of them end up being, you know, worth billions.
Speaker 1: The lipatours and viagraas of the day, those are billion
Speaker 1: dollar pills. And in other words, to get to those,
Speaker 1: they had to be willing to go through dozens and
Speaker 1: dozens of failures trying to solve a particular problem. They
Speaker 1: couldn't in order to get those Southbuster advanced financially advanced
Speaker 1: countries are producing these drugs that save millions of lives.
Speaker 1: They're not coming from backward, I should say, backward emerging
Speaker 1: countries that don't have a sophisticated way of promoting enterprise.
Speaker 1: Now the count the argument people would say is, Professor Schiller,
Speaker 1: these emerging markets, they don't have the wealth that Europe
Speaker 1: with the United States has, How can they be expected
Speaker 1: to develop these sort of things. Fortunately, you're saying it's
Speaker 1: not a function of wealth, it's a for for it's
Speaker 1: a function of intelligent risk management. Unfortunately, these emerging countries
Speaker 1: are moving along. That is the story of our age.
Speaker 1: They're coming up. So it's China, it's India, it's the
Speaker 1: whole Pacific Rim, It's places in South America and Turkey.
Speaker 1: And yet you know the news lately, when you avoid
Speaker 1: the horrible headlines about Ebola and isis whenever I read
Speaker 1: about India, which you know, you look at China as
Speaker 1: a huge success story, although there are stories now about
Speaker 1: it's also become an economic bubble, but India hasn't had
Speaker 1: that problem. India seems to be having a hard time.
Speaker 1: Forget the twenty first century. They have a hard time
Speaker 1: with parts of the twentieth century. Half the country does
Speaker 1: not have indoor plumbing. I think that's the actual number
Speaker 1: of households don't have toilets and indoor plumbing. Their health
Speaker 1: care system is or i should say their public health
Speaker 1: system is. There. People dump garbage and effluence in the
Speaker 1: river and in places where people bathe. And Washington, how
Speaker 1: can in a modern and yet technologically there are very
Speaker 1: advanced country with lots and lots of software companies and
Speaker 1: lots and lots of technology companies outsourced. How do we
Speaker 1: have such a bifurcated society in an immerge gene market
Speaker 1: that should really be doing so well? Well, they do
Speaker 1: have a couple of hundred million people living like an
Speaker 1: advanced country, quality of life, and it's well, this might
Speaker 1: be the story of our times. The world is developing
Speaker 1: into two divisions. The cosmopolitans. The people who are running
Speaker 1: high tech companies in India are very cosmopolitan people. You'll
Speaker 1: see them here in New York. They travel around, they
Speaker 1: know the world. It's the locals who I worry about,
Speaker 1: people who don't develop this kind of sense of the world,
Speaker 1: and um, they may stay behind for a long time.
Speaker 1: I'm hoping now that this will develop better so that
Speaker 1: India will will These things will be the modern technology,
Speaker 1: financial technology will be shared more broadly, find its way
Speaker 1: from the half to the have nots in in countries
Speaker 1: like that. You know, we see nations like Vietnam, and
Speaker 1: forget South Korea. South Korea is now a booming First
Speaker 1: World nation comparable to Japan or developed Western Europe. What
Speaker 1: about some of the other Pacific rim countries we we
Speaker 1: we he see. Vietnam was at one point in time
Speaker 1: a fairly agricultural, fairly aggregarian society. They seem to be
Speaker 1: coming along with a lot of other countries along that
Speaker 1: Pacific rim um. Technological powerhouses, manufacturing powerhouses. Is that the
Speaker 1: path out of of poverty for these nations or is
Speaker 1: that just over oversimplifying it. Well, I don't think all
Speaker 1: of them can do the same thing, and we may
Speaker 1: be saturating the world with some kinds of product. Uh.
Speaker 1: It's this. There's a whole field called development economics that
Speaker 1: studies UH. I'm thinking of. There's a wonderful book by
Speaker 1: Danny Roderick called UH One Many Recipes One Economics. It's
Speaker 1: a book about development economics I recommend, and what he
Speaker 1: says that every country is different and they all faced
Speaker 1: different problems. So you need a development economist to go
Speaker 1: in like a doctor and to try to diagnose the problems.
Speaker 1: It's not a simple thing to know. Often these problems
Speaker 1: are uh created by a culture that is resistant to
Speaker 1: modern ideas, and it can be very hard to dislodge that.
Speaker 1: So this is as much sociological and psychological as it
Speaker 1: is economics. Yeah, I wish these different departments would cooperate more. So,
Speaker 1: let's let's bring this back to the US, and let's
Speaker 1: talk a little bit about UM stocks and valuation. Is
Speaker 1: the one thing we haven't talked about was a measure
Speaker 1: you created called the CAPE, the cyclically adjusted pere ratio.
Speaker 1: Described for listeners exactly what that is. I developed this
Speaker 1: in the eighties with my former student John Campbell. The
Speaker 1: idea is very simple. That price earnings ratio has been
Speaker 1: used for a hundred years or more to judge the
Speaker 1: valuation of a company. Earnings is what it makes you
Speaker 1: want to know how many years earnings do I have
Speaker 1: to pay to buy share of this? Uh? But we
Speaker 1: we thought that the price earnings ratio is as it's
Speaker 1: commonly calculated is is a little bit inaccurate because earnings
Speaker 1: are so volatile from year to year. So we thought,
Speaker 1: let's just average the earnings over more years, so you're
Speaker 1: taking ten years instead of a single quarter or a
Speaker 1: single year. Turns out we weren't the first people to
Speaker 1: think of that, do we We show that that helps
Speaker 1: predict read subsequent returns quite a bit. So in other words,
Speaker 1: when you're looking out at future tenure returns, when the
Speaker 1: CAPE ratio is high, you get worse returns. Right, ratio
Speaker 1: is low. So, in other words, trailing tenuere returns when
Speaker 1: they're low, when you're coming off of a period of
Speaker 1: either earnings are high relative to price or price or
Speaker 1: low relative to earnings looking for so essentially you're saying
Speaker 1: valuation matters. Is that that's the takeaway of the cape
Speaker 1: ratio right now? We use this on index or sector
Speaker 1: indexes or not. So far we haven't used it on
Speaker 1: individual stocks because I think they ten years might for
Speaker 1: a lot of stocks it might not even be ten
Speaker 1: years of runnings history. So but for indexes, uh, you know,
Speaker 1: like looking at the United States, who can forecast earnings
Speaker 1: anyway beyond saying well, they'll be similar to what they
Speaker 1: are in So if the price is high relative to
Speaker 1: what it's been doing for the last ten years, and
Speaker 1: maybe it's not such a great time to be in
Speaker 1: the market. You know. McKenzie did a fascinating study on
Speaker 1: analysts forecasts of earnings and it turns out that over
Speaker 1: the past twenty five years, the consensus estimates of forward
Speaker 1: earnings by the analyst community has consistently been about twelve
Speaker 1: percent a year, but earnings growth has consistently been about
Speaker 1: six percent a year. So they've been twice as optimistic
Speaker 1: as they should be, the only exceptions being in the
Speaker 1: midst of bear markets, they've been twice as barish as
Speaker 1: they should have been. They've been much more negative. So
Speaker 1: forecasting earnings doesn't seem to be what Wall Street does. Especially,
Speaker 1: I'm hoping they're getting better. By the way, from all
Speaker 1: these experiences, you would have thought that two thousand would
Speaker 1: have taught them a certain lesson. And to be fair,
Speaker 1: when we look at the NASDACK today, the NASDACK is
Speaker 1: over four thousand. The P ratio is so much lower
Speaker 1: than it was back in two thousand when when markets
Speaker 1: had gone crazy. From from October to March two thousand,
Speaker 1: that six month period um, the NASDAC doubled. It went
Speaker 1: from twenty hundred to five thousand, and then proceeded to
Speaker 1: collapse down to eleven hundred, and the p ratio was
Speaker 1: over a hundred. It was something crazy, and I believe
Speaker 1: the SMP five hundred peaked. I'm doing this from memory
Speaker 1: somewhere in the mid thirties forties. The cape ratio was
Speaker 1: in the forties in two thousand on the SMP five hundred,
Speaker 1: and let me remind people the SMP five hundred hit
Speaker 1: fifteen hundred right around the peak, and did not get
Speaker 1: over fifteen hundred until thirteen years later. So the forward
Speaker 1: forecast of the CAPE was low and the net returns
Speaker 1: were zero percent a year for thirteen years. So is
Speaker 1: that how investors? Because here's the argument that's been circulating
Speaker 1: on Wall Street about CAPE. You know, the CAPE has
Speaker 1: been saying markets have been overvalued of the time for
Speaker 1: the past twenty years, but that's not really how you
Speaker 1: envisioned using the CAPE hasn't done that well overall for
Speaker 1: the last fifteen years anyway. Well, but the markets themselves
Speaker 1: haven't done all that well over the last you know,
Speaker 1: from the peak in two thousand to last year, effectively
Speaker 1: flat with lots of booms and busts in the middle.
Speaker 1: So really the way investors should use CAPE is a
Speaker 1: forward expectations. Here's what you should expect your returns to
Speaker 1: be for the next ten years, either above average or
Speaker 1: below average, based on whether the CAPE is elevated or not.
Speaker 1: So how price he is CAPE today around range, So
Speaker 1: that's pretty that's not extreme, but it's still significantly It
Speaker 1: should be in the fifteen sixteen range. Is that about right?
Speaker 1: Even at the If you look at what it suggests
Speaker 1: for returns, returns are still in real terms three or
Speaker 1: four percent predicted for the next ten years after inflation
Speaker 1: based on historically It's not a really solid prediction. You
Speaker 1: never know. But uh, if you compare that with the
Speaker 1: re turns you see on bonds, that's real, so it
Speaker 1: looks a lot better. Of course, it's risk here, but
Speaker 1: I think that at this point of time it is
Speaker 1: reasonable to have a substantial fraction of your portfolio in stocks,
Speaker 1: even though they look pricey. What bond market is pricey too,
Speaker 1: So six stock bond portfolio that gets rebalanced on a
Speaker 1: regular basis is something that you wouldn't object to. Yeah,
Speaker 1: I don't want to be responsible if it crashes. Well,
Speaker 1: but we know what happens if stocks crash, everybody rotates
Speaker 1: into treasuries, so bonds do better. That's the whole ideas expensive.
Speaker 1: You know, people forget and and this is right up
Speaker 1: your ally in terms of crowd behavior. In the midst
Speaker 1: of the crisis in O eight oh nine, so many
Speaker 1: funds had poured into US treasuries that the yield had
Speaker 1: gone negative. It was below zero. Here, I'm giving you
Speaker 1: a hundred dollars promised to pay me back in a
Speaker 1: few years. That sounds crazy, doesn't so much for for
Speaker 1: a rational xuberance on the fixed income side. Hey, I
Speaker 1: don't want to own stocks at any price. I'm want
Speaker 1: to buy bonds and only lose a little instead of
Speaker 1: taking a risk in stocks. So a portfolio that that
Speaker 1: is pick a number seventy That seems to make sense
Speaker 1: over the long haul, even with elevated cape ratios where
Speaker 1: where they are and and too depends on your situation though,
Speaker 1: how much risk you can take. And people who are
Speaker 1: living in retirement, maybe that's too much stocks. So yeah,
Speaker 1: you have to talk to your adviser. I can't. There
Speaker 1: is no perfect portfolio for every let's so let's caveat this.
Speaker 1: This we're talking very generally. We're not talking obviously. Someone
Speaker 1: who's eighty years old and living on a fixed income
Speaker 1: is going to have a very different portfolio than someone
Speaker 1: who's twenty and as a fifty year window till they retire,
Speaker 1: or someone who's especially risk averse or especially risk embracing.
Speaker 1: Those are two. All that stuff has to be personalized.
Speaker 1: There is no magic formula for for everybody. So I
Speaker 1: want to go back to what you said earlier that
Speaker 1: you know stocks are fully priced, but we're not in
Speaker 1: two thousand territory. You said this feels sort of like
Speaker 1: six or so. Is that's just a guess, right? I mean,
Speaker 1: I'm not We're not quoting you as saying Bob Shiller
Speaker 1: says the market has four more years to run. You're
Speaker 1: saying we still haven't hit that crazy bubble level. See,
Speaker 1: and I think of political and sociological factors, Marc for
Speaker 1: exact ample, we just elected a Republican Congress. Now, we
Speaker 1: could have reacted to the current situation by electing Democrats
Speaker 1: who might raise taxes on the rich. Maybe they were
Speaker 1: more stimulus, more infrastructure. I think that you wouldn't you think?
Speaker 1: Perhaps it's so hard to predict how people with Americans
Speaker 1: are returning to their roots, which is a free market
Speaker 1: belief in capitalism. So we put in these Republicans and
Speaker 1: that sounds good for the stock market. Maybe that's what
Speaker 1: was part of what was driving the market recently. Well,
Speaker 1: but you've had a market that's going up since March
Speaker 1: o nine and Obama has been president. So we went, sorry,
Speaker 1: it tripled, it tripled, but it's up to right, So
Speaker 1: we The low in March O nine was six six
Speaker 1: six on the SNP five hundred. We're just about two
Speaker 1: thousand from spinning distance. That worries me, by the way.
Speaker 1: That worries me. Uh, it looks like it's something that
Speaker 1: there could be attorney, but I just don't know. But
Speaker 1: here's the thing that everybody forgets. It's easy to start
Speaker 1: at the very low. In two thousand, the SMP was
Speaker 1: at fift hundred. So here we are, thirteen fourteen years later,
Speaker 1: we're barely thirty three percent higher than when we were
Speaker 1: where we were in two thousands. Oh and by the way,
Speaker 1: if you correct for inflation, that's I mean, we're right
Speaker 1: back where we were, So no net net So there's
Speaker 1: like sixty six to eighty two. It looked like you
Speaker 1: were flat, but really you lost sixty or seventy of
Speaker 1: your portfolio because of because of inflation. So I'm gonna
Speaker 1: change um subjects on you again. And one of the
Speaker 1: things that I bet people don't know about you is
Speaker 1: that your good friends UM with a professor who teaches
Speaker 1: at Pennsylvania who goes Jeremy Jeremy Segal. Right, So did
Speaker 1: you two guys come to and by the way you
Speaker 1: two couldn't be I've done shows with Jeremy years ago.
Speaker 1: Um YouTube personality wise couldn't be more different. How did
Speaker 1: you two guys ever become well? Uh, we went to
Speaker 1: graduate school at m I T together together and m
Speaker 1: I T. Being very orderly because you know their engineers.
Speaker 1: They had us show up for chest X rays diagnostic
Speaker 1: in alphabetical X so we were waiting in line. We
Speaker 1: had a long conversation. So he and I are actually
Speaker 1: very similar in some ways. I learned a lot from him,
Speaker 1: but we're interested in the real world. Now, economics programs
Speaker 1: are often populated by people who are interested in mathematics.
Speaker 1: But we were both also, but I think we uh
Speaker 1: we we had similar fascination with both. That that's what
Speaker 1: makes very good. His famous book Stocks for the long
Speaker 1: run essentially edition of his and now you have a
Speaker 1: third edition coming out of a Rational coming out in February.
Speaker 1: So he's two editions ahead of you. That's not although
Speaker 1: I'll do it, it'll take me twenty years now, but
Speaker 1: you've had a lot more You've published a lot more
Speaker 1: books than he has. So when when you guys are
Speaker 1: on the bookshelves, and he says I'm up to my
Speaker 1: fifth edition. You get to say, but look how many
Speaker 1: books I've and I understand you. Your families are close.
Speaker 1: You guys vacation together. Really that's that's quite that's quite fascinating.
Speaker 1: And that goes back to grad school at UM at
Speaker 1: M I t that's ah, that's amazing. So we've been
Speaker 1: talking about everything from valuations and bubbles to a rational
Speaker 1: um behavior. What sort of changes would you like to
Speaker 1: see an investor behavior? If you can educate the investing public,
Speaker 1: what would you like to see the do differently than
Speaker 1: they're doing today? Well, that's an interesting question. First of all,
Speaker 1: I've said before they should get an advisor. Uh. Secondly,
Speaker 1: I think that we need better investor education because people
Speaker 1: could know a lot more about Thirdly, if we had
Speaker 1: better appreciation of finance, I think people could participate in
Speaker 1: products that would help them manage risks to their lives,
Speaker 1: like home equity insurance insurance against losses in the value
Speaker 1: of your home, or mortgages that protect you against home
Speaker 1: price declines. And someday I think there will even be
Speaker 1: livelihood insurance that protect you against they drop in your
Speaker 1: ability to earn an income. Uh. These are things I
Speaker 1: talked about in my books. They're kind of futuristic finance.
Speaker 1: Have you been tracking the or following the new set
Speaker 1: of markets the allow you to invest in the future
Speaker 1: income of athletes. Have you been saying I talked about
Speaker 1: that in my book Interrational Zuberans in my book New
Speaker 1: Financial Order. Yeah, the so called Bowie bonds where you
Speaker 1: could invest in David Bowie his future income. That worked
Speaker 1: out to be really good for Bowie. I don't know
Speaker 1: how well that worked out for I don't know what
Speaker 1: happened to David. Well, it wasn't just that. It was
Speaker 1: that record sales eventually fell off a cliff and he
Speaker 1: sold his catalog, so he took the cash up front
Speaker 1: instead of that's good for David Bowie. Yes, it turns
Speaker 1: out he's a savage. You shouldn't hold Bowie bonds as
Speaker 1: the only thing in your portfolio. So if you held
Speaker 1: a diversified portfolio, a little a little Leonard Skinner, it,
Speaker 1: a little led Zeppelin it, it'll works go beyond just
Speaker 1: that sort of thing. So, so these ath there's a
Speaker 1: company out I think in California that's essentially doing the
Speaker 1: equivalent of I P O S where they take an
Speaker 1: athlete and they allow you to buy a percentage of
Speaker 1: his income and you don't know if he's going to
Speaker 1: get injured next year. What what sort of endorsements? That
Speaker 1: seems like a kind of interesting form of speculation. Um,
Speaker 1: what sort of stuff along those lines? By the way,
Speaker 1: with Milton Friedman advocated something like this in the nineties
Speaker 1: sixties in his book Capitalism and Freedom for Everyone. We
Speaker 1: should all be able to sell shares in our income.
Speaker 1: Although then he kind of took it back. Milton Friedman
Speaker 1: had some sense of reality and he said, this is
Speaker 1: not for now in America, So we we all can't
Speaker 1: have individual I p o s. That's not gonna well someday.
Speaker 1: But see he was commenting in his book that they're
Speaker 1: kind of hard to enforce, right, um enforce what trading
Speaker 1: people could? We could jump, they move away and then
Speaker 1: you can't find them anymore. So how are you going
Speaker 1: to capture a stream of That's what he said. Yeah,
Speaker 1: but if you're an athlete playing for a professional team,
Speaker 1: you can find them. So I always thought that was
Speaker 1: kind of a risky thing. You know, you an injury,
Speaker 1: you're done, you say something and forget the craziness that
Speaker 1: happened with the NFL earlier this year. It's two. It
Speaker 1: seems very easy for an athlete to put his you know,
Speaker 1: not everybody's Lebron James. Not everybody is a Michael Jordan
Speaker 1: who's going to have a thirty year stream of UM
Speaker 1: endorsement revenue. Or look, you know, there are millions of golfers.
Speaker 1: There's only a handful of guys like Arnie Palmer and
Speaker 1: Jack Nicholas who when their golf career was over they
Speaker 1: went on to build businesses, building golf courses. That that
Speaker 1: just seems like a challenging sort of ip O. So
Speaker 1: to bring that back to individuals, what else do you
Speaker 1: think they should do to too rain in the worst
Speaker 1: aspects of their behavior? How should people control their psychological
Speaker 1: im You need a therapist, Maybe you need some antidepressant.
Speaker 1: You know, we're medicating people and more and more people
Speaker 1: or probably I uh so, So aside from anidepressants, most
Speaker 1: of our listeners are investors. What could they do to
Speaker 1: avoid the worst aspects of their own cognitive errors and
Speaker 1: behavioral foibles? Well, I think you have to be introspective
Speaker 1: and you have to understand psychology, and there are some
Speaker 1: important books that I recommend. For example, Daniel Kaneman wrote
Speaker 1: a book called Thinking Fast and Slow, which is a
Speaker 1: summary of a lot of important UM research in in
Speaker 1: psycho especially as relates to investing. It's a fascinating book.
Speaker 1: It's it's a little thick, but it's definitely readable. He
Speaker 1: writes a very accessible style. What what else? Um? What
Speaker 1: sort of other books have caught your eye when you
Speaker 1: talk about emotion? Antonio Dimasio wrote a book called Descartes Error,
Speaker 1: referring to Renee Descartes. Uh was a philosopher hundreds of
Speaker 1: years ago who advocated emphasizing your rational self. There, Yeah,
Speaker 1: he was. He thought that you had two sides to
Speaker 1: your mind, your rational and your emotional, and that the
Speaker 1: important thing philosophically is to just clear out all of
Speaker 1: the emotion. But Demacio said, you can't do that your brain.
Speaker 1: There is no clear division in your brain that you
Speaker 1: the emotions are built in. Uh. So that's another interesting book.
Speaker 1: So so when you say no yourself, be aware of
Speaker 1: your own you really is really a way of saying, hey,
Speaker 1: be aware of your own propensity to allow your emotions
Speaker 1: to to get the best of you. So let's talk
Speaker 1: for a second about your own portfolio. Um. We we
Speaker 1: both had discussed passive investments and long term indexes. Is
Speaker 1: there anything else you do besides that? Or do do
Speaker 1: you walk the walk as well as uh? Uh? As well? Well,
Speaker 1: I am not. Uh My I have. I'm working with
Speaker 1: Barclays Bank on some investment products, but I leave a
Speaker 1: lot of the management of that to them because I
Speaker 1: can't do everything, and I'm not. I'm not watching individual
Speaker 1: stocks on a daily basis. So you're an index investor.
Speaker 1: Is that a kind of statement? Not? Well, I do
Speaker 1: sector indexes. Yeah, I do some individual stocks, but I don't. Uh.
Speaker 1: I have a very busy life. I just don't have
Speaker 1: time to do um. I write newspaper columns, I write books.
Speaker 1: That's right. I left out your your columnist for the
Speaker 1: Sunday Business section in the New York Times. You're you're
Speaker 1: part of a group with let's see who else is
Speaker 1: in that Tyler Collen, Greg manque Um, Richard Thaller. I'm
Speaker 1: trying to remember who else is in that room, that's right.
Speaker 1: And that's a murderous row of of writers there, to
Speaker 1: say the least. So it's fair to say you're not
Speaker 1: actively on a terminal trading every day. You're really a
Speaker 1: longer term. Uh well, I don't actually need money either.
Speaker 1: I think I'm all set for You're okay, and you're
Speaker 1: still working any plans all the time. No, I have
Speaker 1: no plans to retire full time faculty member. And that's
Speaker 1: for as far for the next fifty. To spend time
Speaker 1: with my students too, I try to. I I have
Speaker 1: too many of them to do as good as I should.
Speaker 1: So I could keep you here for another hour, but
Speaker 1: I know you have an appointment. UM up after this
Speaker 1: honoring a a colleague of yours from Columbia University at
Speaker 1: the New York Times. So I want to thank you
Speaker 1: for how much time you spent with us. I really
Speaker 1: appreciate it. We've been speak taking with Yale professor Robert Schiller.
Speaker 1: UM be sure and check out our previous podcasts that
Speaker 1: are on iTunes and Bloomberg dot Com. You're listening to
Speaker 1: Masters in Business with Barry Ridholts on Bloomberg Radio