I read this not long after I had read Malkiel’s “A Random Walk Down Wall Street”. Both books came out in new editions this year, and both had been on my long list of books to read in the back of my head.
Oddly enough, both books were compelling and believable. The reasons that this is odd is mostly because one would think that they are diametrically opposed. The entire argument of Malkiel is that you can’t beat the markets consistently, so the best bet is to get into index. This is an acceptance of part of the efficient market hypothesis, where there is no free lunch and arbitrage opportunities disappear and are not predictable.
I can be into Shiller too because there is another part of the EMF that says that market prices are the right prices, so the value of the market is the true value of the market. If this is true there should never be any bubbles. You should also never be able to short sell anything unless you had inside information. But alas, the market can stay irrational longer than you can stay liquid. Bubbles do happen, in all markets and everywhere. Shiller got a bit lucky by having the first edition of this book come out at the point where the dot com bubble was right at the top. Those who had gone all in on technology were not as lucky. As Shiller examines. bubbles can and do happen.
So how can I reconcile the fact that the EMF is the tool I rely on for investing even though I have full knowledge that bubbles happen and massive dollar amounts are lost in them? I answer by saying that the markets are rational enough. Bubble happen, but it is hard to know when you’re in them and you can’t time them. The prominent economist who called the housing bubble beforehand are small in number. If they were calling it, they were dismissed as bearish or too heterodox. Too many people had failed to read their Kindleberger. This time wasn’t different and the bubble popped. Harder to know is when it will pop and at what level. That’s where the EMF works. When it pops, you’re going down with it, but so will everyone else. It makes me think of a couple of quotes. First, Keynes: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally,” and then Citi’s Chuck Prince approps the last bubble: “As long as the music is playing, you've got to get up and dance”. Sure, if you were in the main indices you lost half the value of your investments. Of course if you stayed in them you made them all back. Now imagine if you had put all your money into junior tranches of residential mortgage backed securities -- it seemed like a sure thing, but you would have ended up with nothing. It’s not perfect, but the market is efficient -- enough.
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Way too abstract, no clear answers in 270 pages
If you’re looking for a clear and to-the-point analysis of bubbles and the dynamics of the stock market, answers to questions such as what drives prices and forces in the market, with clear conclusions and findings that leave you equipped with practical investment skills and knowledge, this book is NOT for you.The writing style of Shiller is very very academic (as it should be excepted from a professor), and that makes this book a very tough read. He approaches every topic from 10 angles, and leaves you very confused as to what to believe, almost always lacking clear conclusion at the end of the discussion of any topic.Ultimately, the net message of this book is, that the stock market is unpredictable, the efficient market theory has substantial flaws, and that bubbles are mostly driven by the uncontrolled, emotional behavior of market participants, who act unpredictably and irrationally, and therefore drive the market into unpredictable terrain. Essentially, put simply, his argument is that FOMO (fear of missing out), paired with sensational and irrational news reporting about market events, is what really drives prices in the market. The book leaves you thinking nothing is predicable in the stock market, people are practicing irrational exuberance especially in times of bubbles, and there is nothing one can do about it. The stock market is a hot mess, is really what this book is trying to convey. It is not helpful in the search for answers and for the most part a tiring and boring read. I forced myself reading to the end in the search for clear answers, and I was left disappointed.That said, to end on a positive note, maybe the stock market is indeed that - unpredictable and irrationally exuberant. And that might be an important fact that deserves elaboration, but it should not take 270 pages to get to that conclusion.Lastly, the font size is tiny in this book. I have never owned a book with such small font size.
Top reviews from other countries
Juan F.
Un eje guía para todo un mar de concepciones de la ciencia económica
Reviewed in Mexico on August 2, 2021Georges Levesque
Great book but awful font type and size.
Reviewed in Canada on February 21, 2021
Gaetano Vivirito
Great view on behavioural finance
Reviewed in Italy on May 6, 2021