My optimism overfloweth

“The report of my death was an exaggeration.”  –Mark Twain

A couple weeks ago Robert Schiller published an article warning investors that the next couple decades are going to be tough ones for the stock market, and they should prepare themselves accordingly.  I read this and I have to say that I disagreed with him.  Professor Schiller won the Nobel prize in economics last year and is a world renowned professor at Yale; I was one of 100 students to graduate with honors from the University of Chicago’s MBA program in 2006.  It should be pretty obvious which of the two of us is just a little more credible.

The premise of Professor Schiller’s argument is that stocks are at all-time high valuations, and they have to come down.  Intellectually I agree with this, but I think he’s missing the mark in two major ways:

Nobel laureate, Robert Schiller


Predicting major moves in the stock market is really, really hard

As we learned from A Random Walk Down Wall Street (I’m sure you all went out and read it after reading my incredible review, right?), it’s nearly impossible to predict when things will happen with the stock market.  In 2015 Professor Schiller is predicting we’re going to have a major correction/sustained period of flat stock prices.  Sure, he’s probably right that that will happen, but is it going to be in 2015, or in 2020 when stocks are 50% higher than they are today, or in 2030 when they are double what they are today?

I think this is where history is a good guide.  The 1980s were an awesome decade for the stock market* with returns averaging an astounding 14% per year.  As you can imagine, there were a ton of pundits saying the stock market rose too fast, valuations were too high, things just weren’t making sense–you had to get out of the stock market.  What happened?  The 1990s came along and outperformed the 1980; stocks returned 18% per year.  People didn’t realize that the computer revolution of the 80s was leading to the internet revolution of the 90s, and if you missed the 1990s investing boat because the 1980s had been so good, you were hating life.

Even look at the internet boom and the bubble that eventually burst in 2000.  In the 1990s year after year, the stock market was putting up tremendous gains.  I remember in about 1997 or 1998 the chorus of naysayers was deafening; they were predicting that valuations didn’t make sense, a bubble was building, and stocks were going to plummet.  It turned out they were right, but the plummet happened 4-5 years later.  In the meantime, the DJIA went from 6800 in 1997 to a peak of 11,200 in 2000.  Of course, the bubble burst, but the stock market only went down to 7600 (Sep 2002).  Sure the pundits were right .  . . sort of.  The bubble burst, but if you took their advice when they gave it, you would have missed out on a market that rose from 6800 to 7600 with a crazy ride in the middle.

The history of the stock market is littered with these examples; literally everyday you have some market expert saying the end is near, yet the market consistently proves them wrong.  Professor Schiller is much smarter than I am, and there probably will be a time they the stock market crashes or goes sideways for a long time.  But no one knows when that is (and I would think Professor Schiller would agree that he doesn’t know that either), and you might miss out on a great run in the meantime.


Innovation is always happening

Innovation is one of the main drivers of the stock market.  Companies innovate, figuring out new ways to do it better, faster, cheaper.  This leads to higher profits which lead to higher stock prices.  It was the electronics innovations of the 1950s that led to 160% increase in stocks in that decade, computing innovations of the 1980s; and internet innovations of the 1990s.  Sure you have off decades like the 1970s and 2000s, but those happen less often; even then innovation is still happening, but it’s just not translating to stock gains until later.  Is there any reason to believe that in the next 20 years we won’t have unimaginable innovations that will change our lives the way computers and the internet did?  I think those will happen and I think those will drive stocks higher.

google car

Eventually cars will drive themselves.  My neighbor just bought a Tesla and the thing can start itself, open the garage, pull out, and have the car all nice and toasty, so all Mr Grizzly has to do is get in and go.  There is no doubt in my mind that in a few years they’ll be driving themselves.  Can you imagine once that happens?  Auto accidents and drunk drivers will all but be eliminated.  Old people, blind people, pre-16 kids will have incredible mobility.  Traffic jams will fade away.  Commuters will have hundreds of hours of their life back each year.  And all this innovation will make some companies tremendous profits and their stocks will skyrocket.

Every year solar panels become more efficient and less expensive.  Soon they are going to be as common on roofs as DirecTV dishes.  Electricity bills will go down, carbon emissions will drop (also thanks to automated, electric cars from above).  The world will benefit and some companies are going to make a killing.  Amazing medical advances are happening every day; really smart people at are figuring out how drones are going to change the world; light bulbs are going to last 100 times longer and use 100 times less power; new methods are going to find more oil less expensively.

I’m going to be wrong on nearly all the details I listed above, but I truly believe that I am going to be right on the general message that the innovations we have in store for us are going to dazzle our minds.  And they’re going to make tons of money for the companies that do them, and tons of money for the investors who own those stocks.


So I respectfully think Professor Schiller is wrong.  Investing in stocks is a great investment now and will be a great investment for years to come.  In fact, I’m putting my money where my mouth is and have 95% of the Fox’s portfolio in stocks.  I would welcome Professor Schiller to respond—he’s always welcome to write a guest post 🙂 .  Of course if he does, I will become giddy as a school girl and ask that he pose with me for a picture and then autograph it.


*  I’ll be using the Dow Jones Industrial Average in these examples

One thought to “My optimism overfloweth”

Leave a Reply

Your email address will not be published. Required fields are marked *