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Title: Irrational Exuberance by Robert J. Shiller ISBN: 0-7679-0718-3 Publisher: Broadway Pub. Date: 10 April, 2001 Format: Paperback Volumes: 1 List Price(USD): $15.95 |
Average Customer Rating: 3.82 (56 reviews)
Rating: 5
Summary: Excellent Education on the Market - and Enjoyable Easy Read
Comment: I am not a financial expert. I have traded stocks, futures and index funds but that is the extent of my involvement with the market.
Having said that I think it is not necessary to be an expert to read and appreciate the book. In fact the book uses a lot of common sense in its presentation of market data and the discussions of the data and the markets.
The most striking thing to me about the book is the description and summary concerning macro trends or cycles in the market. These cycles can extend decades. For example since approximately the late 1800's there have been five or six speculative bull runs to high market P/E values. The exact reason is different for each run up. We have seen run-ups due to the companies involved with railway stocks a century ago, the telephone as an investment tool in the 1920's, and then the new internet companies and trading electronically in the 1990's. The way stocks are bought and are sold and the financial instruments vary with the year or era. But these cycles repeat themselves every decade or two.
In almost every case investors participating in the speculative market spike or bull-run gets carried away and thinks this time, in this era, whether it was the 1920's or the 1990's that investing is now "different". The rules have changed. The high P/E ratios are now the norm. It is a "new era" and the old rules do not apply. Sound all too familiar? But in each and at every peak in the S&P or Dow, reality eventually sinks in, the investors pull back, and the market drops back to its historical average levels. That average level is a P/E ratio for the large cap or S&P 500 companies having an average P/E ratio in the general range of 10 to 20 or 25 maximum.
For some people foolish enough to invest near the market highs, and then who ride the market down have had to wait 20 years to see their stocks return to the same value at which they were purchased. Some stocks and companies do not survive the downturn and the investment vanishes. Now in our time one can only speculate on how many years or decades it will take for the NASDAQ to return to the 5000 to 5500 level.
This is sobering book, and it rates 5 stars for a short but excellent read and education.
Jack in Toronto
Rating: 4
Summary: Calling the top of the market
Comment: The current importance of Professor Robert J. Shiller's prescient publication in March 2000, right near NASDAQ topping out around 5000, is to see what relevance it has for us today. He begins with 12 factors he believes played a major role in creating the bull market/boom/bubble of the late 1990s, and ends with an assessment of which of those 12 will continue to play an influential role going forward. That, too, should be our concern.
First, let me say that his deconstruction of the "efficient market theory" probably has more lasting importance in the financial world than his assessment of whether we had an overvalued stock market, and should be taken to heart by everyone who wants to make money in the stock market. In over a decade as a member of two securities exchanges, I never found any evidence that the random walk or efficient market theories had any significance in real world finance. An ivory tower construct, for sure.
Prof. Shiller's 12 reasons for the 1990s boom and their current/future influence:
1. The Internet: It remains a viable growth engine, but got ahead of itself. The Internet continues as a strong influence on business and the stock market.
2. Decline of foreign competition: Our victory over communist economies is waning. New competition (China) will emerge on the world scene.
3: Pro business culture: Could easily turn against the market.
4. Pro business governmental policies: Could easily turn against the market.
5. Life cycles - Baby Boomers: He expects the positive effect to diminish.
6: Financial press reporting: Probably will continue but not show much growth.
7: Optimistic analysts: Can easily turn negative.
8: Retirement plans: Social Security is a potential plus if redirected into stocks.
9. Growth of mutual funds: Difficult to ascertain.
10: Decline of inflation: Can't get lower; can only get worse.
11: Day trading/increased public participation: Likely to continue. More people's access could elevate prices.
12: Rise of national gambling culture: He admits the connection between gambling and the stock market is weak.
Prof. Shiller is pro-markets. His concern is whether outrage over the bursting of irrational bubbles might do irreparable harm including turning our society against our capitalistic and free-market institutions. On this point he eloquently states, "Speculative markets perform critical resource-allocation functions (a point I have taken for granted and have not focused on in this book), and any interference with markets to tame bubbles interferes with these functions as well. Ultimately, in a free society, we cannot protect people from all the consequences of their own actions. We cannot protect people completely without denying them the possibility of achieving their own fulfillment. We cannot completely protect society from the effects of waves of irrational exuberance or irrational pessimism - emotional reactions that are themselves part of the human condition." (p233).
Perhaps this is why under the subject of what role government might play in cooling down irrationality before it becomes destructive, I did not notice any reference to the FRB's role of setting margin rates on stock purchases. This power (Reg T) was created precisely to cool down speculative markets when they get too hot. Greenspan, for whatever reason, chose not to invoke this tool during the boom.
In the end, Prof. Shiller blames investors for their blind exuberance and predicts more difficult times ahead. Indeed, his fears have been borne out the past 3 years. But even he does not rule out another run based on new factors and old psychology because not only is it human to err, but also it is human to be irrational. The solution? In his words, "It may be that the best stabilizing influence on markets is to broaden them, allowing as many people to trade as often as possible." This is why in his next book, "The New Financial Order: Risk in the 21st Century" (2003) (see my review), Prof. Shiller confronts how government and society can work together to mitigate future emotional disruptions to our everyday lives through market-based instruments.
Rating: 4
Summary: Psychologizing Markets
Comment: Stock markets are complex and mysterious creatures. Predicting their behavior is a fantasy that has persisted in investors' minds for ages, and various tricks have been conjured to anticipate (and profit) from stock movements. What all these techniques have in common in an expectation that markets can indeed be predicted-and that they all, invariably, fail.
Robert Shiller, of Yale University, contributes to this debate by canvassing the salient features that characterize the stock market. First, he argues that markets tend to be irrational: prices skyrocket based on frenzy, not fact. Price-earning ratios, for example, tend to move much higher than earnings, implying that expectations are not based on higher expected earnings. The same irrationality, Mr. Shiller continues, can be observed in the relation of stock prices to dividends: stock prices are more volatile than dividends, meaning that prices cannot be fully reflective of expected dividends, as the efficient market theory would predict.
So what determines stock prices then? This is the book's most creative part, at least for those familiar with economics but not psychology. Two factors, the media and "new era" thinking, tend to create an undue optimism about markets, causing prices to exceed rational limits. These two trends, however, are amplified by psychological phenomena: an overwhelming trust in the opinion of authorities, overconfidence in one's investment strategy, a linear reasoning that cannot be defended against uncertainties or complications, and so on.
Any reader should be impressed by the complexity and accessibility of Mr. Shiller's analysis. If his book is taken as a prognosis of the 1990's bubble bursting, then "Irrational Exuberance" is a timely warning that proved correct. But what makes this book a classic is its magnificent combination of economics, econometrics, sociology and psychology in analyzing the stock market. This much needed interdisciplinary work makes this book a must read for investors and policymakers alike.
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Title: The New Financial Order : Risk in the 21st Century by Robert J. Shiller ISBN: 0691091722 Publisher: Princeton Univ Pr Pub. Date: 02 April, 2003 List Price(USD): $29.95 |
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Title: The Psychology of Investing by John R. Nofsinger ISBN: 0130930245 Publisher: Prentice Hall Pub. Date: 15 January, 2002 List Price(USD): $29.20 |
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Title: Stocks for the Long Run : The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies by Jeremy J. Siegel ISBN: 007137048X Publisher: McGraw-Hill Trade Pub. Date: 21 June, 2002 List Price(USD): $29.95 |
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Title: Technical Analysis for the Trading Professional by Constance M. Brown, Ed Jones, George C. Lane ISBN: 0070120625 Publisher: McGraw-Hill Trade Pub. Date: 31 March, 1999 List Price(USD): $49.95 |
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Title: Market Volatility by Robert J. Shiller ISBN: 0262691515 Publisher: MIT Press Pub. Date: 30 January, 1992 List Price(USD): $37.00 |
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