"Other than those two periods (right after WWII, with the first increase starting just before the war ended. and a period that appears to reflect a lagged response to the 1990 stock market boom), real home prices overall have been mostly flat or declining. Moreover, the overall increase (with real prices up 66% in the 114 years from 1890 to 2004, or 0.4% a year) was not impressive." P:20
"The problem is that people in glamorous regions often tend to believe that land prices, already a significant component of home value there, will keep going up and up. Surely, they think, there is some advantage to living in those areas. People do enjoy the prestige of living in an area where celebrities live, and they also benefit from the business opportunities there. It is easy for residents there to imagine that more and more people are thinking similarly, and that they will continue to bid up real estate prices in their city. This is irrational exuberance in the context of real estate". P:24
"But one must remember the implicit dividends that one receives from living in a home, that is, the value of the shelter and other services provided by a home. These dividends are untaxed. It is often said (correctly) that these is a tax advantage to owning rather than renting. If one swapped houses with one's neighbour living in an identical house and each paid rent to the other (so that the rent received would cancel out the rent paid), the transaction would be virtually meaningless from an economic standpoint, but it would incur taxes, since the rent received would be taxable while the rent paid would not be deductible. For this reason, most people are well advised to buy rather than rent the homes they live in." P:25
"Life was simpler once; one saved, and bought a home when the time was right. One expected to buy a home as part of normal living, and didn't think to worry about what would happen to the price of homes. The increasing large role of speculative markets for homes, as well as other markets, has fundamentally changed our lives." P27
"Understanding the factors that precipitate market moves is doubly difficult because the timing of the major market events tends no to be lined up well with the timing of the precipitating factors. The precipitating factors often tend to be medium-term trends that catch the public's attention only after they have been in place for a long time. The timing of specific market events is, as we shall discuss in the next chapter, directly determined by people's reactions to the market and to each other, which impart to the market complex internal dynamics. But we must look at the precipitating factors if we are to understand why the market moves." P:32
Analysts were especially reluctant to makes sell recommendations near the peak of the stock market for a couple of reasons. One reason often given for this reluctance is that a sell recommendation might have incurred the wrath of the company involved, and companies could retaliate by refusing to talk with the analysts whom they viewed as submitting negative reports, excluding them from information sessions, and not offering them access to key executives as they prepare earning forecasts. This situation on the way to the peak of the market represented a change in the fundamental culture of the investment industry, and in the tacit understanding that recommendations are as objective as the analyst can make them.
Another reason that many analysts were reluctant to issue sell recommendations is that an increasing number of them were employed by firms that underwrite securities, and these firms did not want their analysts to do anything that might jeopardize this lucrative side of the business. Analysts affiliated with investment banks gave significantly more favourable recommendations on firms for which their employer was the co- or lead underwriter than did unaffiliated analysts, even though their earnings forecasts were not usually stronger" P:45
"Encouraging longer-term thinking among investors is probably, all in all, a good thing. But an additional effect of 401(k) plans as they are structured today may be to boost demand for stocks further through another psychological mechanism. By offering multiple stock market investment categories for employees to choose among, employers can create demand for stocks. An effect of categories on ultimate investment choices was demonstrated by economists Shlomo Benartzi and Richard Thaler. They found, using both experimental data and data on actual pension fund allocations, that many people tend to spread their allocations evenly over the available options, without regard to the contents of the options. If a pension plan offers a choice of a stock fund and a bond fund, many people will put 50% if their contributions into each. If the plan instead offers a choice between a stock fund and a balanced fund (with say 50% stocks and 50% bond in it), many people will still tend to put 50% into each, even though they are now really putting 75% of their portfolio into stocks.
The options offered as part of 401(k) plans tend to be heavily weighted in favour of stocks. In contrast, most 401(k) plans do not have any real estate options. In this way the growth of 401(k) plans has encouraged the growth of public interest in the stock market relative to the real estate market." P:48
"In 1979 economists Franco Modigliani and Richard Cohn published an article arguing that the stock market reacts inappropriately to inflation because people do not fully understand the effect of inflation on interest rates. When inflation is high - as it was when they wrote, near the bottom of the stock market in 1982 - nominal interest rates (the usual interest rates we see quoted every day) are high because they must compensate investors for the inflation that is eroding the value of their dollars. Yet real interest rates (interest rates as corrected for the effects of inflation) were not high then, and therefore there should not have been any stock market reaction to the high nominal rates. Modligiani and Cohn suggested that the market tends to be depressed when nominal rates are high even when real rates are not high because of a sort of "money illusion", or public confusion about the effects of a changing monetary standard. When there is inflation, we are changing the value of the dollar, and therefore changing the yardstick by which we measure values. Faced with a changing yardstick, it is not surprising that many people become confused.
Public misunderstanding about inflation at the present time encourages high expectations for real (inflation-corrected) returns. Most data on past long-run stock market returns are reported in the media in nominal terms, without correction for inflation, and people might naturally be encouraged to expect that such nominal returns would continue in the future. Inflation today is under 2%, compared with a historical Consumer Price Index level of inflation that has averaged 4.4% a year since John Kennedy was elected president in 1960. Therefore, expecting the same nominal returns we have seen in the stock market since 1960 is expecting a lot more in real returns." P:51
"Many of the major finance textbooks today, which promote a view of financial markets as working rationally and efficiently, do not provide arguments as to why feedback loops supporting speculative bubbles cannot occur. In fact, they do not even mention bubbles or Ponzi schemes. These books convey a sense of orderly progression in financial markets, of markets that work with mathematical precision. If the phenomena are not mentioned at all today, then students are not given any way to judge for themselves whether or not they are in fact influencing the market." P:78
"...high pricing of the market in 1901 was not followed by any immediate or dramatic price decline, but rather that prices ceased to increase and that eventually, after some twenty years had elapsed, the market had lost most of the real value it had had in 1901. The change took so long to work itself out that it is rather more generational in character, and therefore it is hard to find comment about in the media." P:125
"End of new eras seem to be periods when the focus of debate can no longer be so upbeat. At such times, a public speaker may still think that it would be good business to extol a vision of a brilliant future for the economy, but it is simply not credible to do so. One can, at such times, present a case that the economy must recover, as it always has, and that the stock market should go up, as it historically has, but public speakers who make such a case cannot achieve the command of public attention they do after a major speculative market run-up and economic boom. There are times when an audience is highly receptive to optimistic statements, and times when it is not." P:131
"The data on which these tables are based confirm for countries the results first discovered by Warner De Bonds and Richard Thaler: that winner stocks - in winner status is measured over long intervals of time such as five years - tend to do poorly in subsequent intervals of the same length, and that loser stocks - if loser status is measured over equally long intervals - tend to do well in subsequent intervals of the same length" P:142
"Quite possibly, the tendency for individual countries' stock market valuations to grow dramatically and then to be reversed will diminish in the future. With freer capital movement than were possible during the periods covered by the examples in the tables, and with more and more global investors seeking profit opportunities buying undervalued countries or shorting overvalued countries, markets may become more stable. Even so, it is unlikely that these forces will soon eliminate the potential for such movements, particularly infrequent and slow large-country events or worldwide events, for which the attendant profit opportunities are slow and hard to diversify, The possibility of major speculative bubbles, now and in the future, cannot be ignored." P:142
"It has been notes that employees have a tendency to invest in company stock, even though it would appear to be more in their interest to diversify away from the source of their own livelihood...This tendency to invest in company stock can be interpreted as consistent with investors' being influenced by stories: they know many more stories about their own companies and so invest in those companies' stocks.
People also appear to want to construct simple reasons for their decisions, as if they feel the need to justify those decisions in simple terms - if not to others, then to themselves. The need to have a simple reason to explain decision is similar to the need to have a story behind a decision; both the stories and the reasons are simple rationales that can be conveyed verbally to others." P:151
"A fundamental observation about human society is that people who communicate regularly with one another think similarly. There is at any place and in any time a Zeitgeist, a spirit of the times. It is important to understand the origins of this similar thinking, so that we can judge the plausibility of theories of speculative fluctuations that ascribe price changes to faulty thinking. If the millions of people who invest were all truly independent of each other, any faulty thinking would tend to average out, and such thinking would have no effect on prices. But if less-than-mechanistic or irrational thinking is in fact similar over large numbers of people, then such thinking can indeed be the source of stock market booms and busts." P:157
"Another piece of evidence that has been offered in support of the efficient markets history is that professional investors, institutional money managers, or securities analysts do not seem to have any reliable ability to outperform the market once account is taken of transactions costs and management fees. This result may seem puzzling, since once would think that professional investors are more educated about investing, more systematic, than individual investors. But perhaps the results is not too puzzling as it as first seems. Individual investors get advice from professional investors, and they can also observe (albeit with some time lag) what professional investors are doing. So there may be no significant difference between the success of professional investors and the market as a whole, even if their analysis is very valuable to others. Individual investors with substantial resources tend to be educated and intelligent people, too. Moreover, some recent studies have documented that professional analysts' advice is indeed worth something, if it is acted upon swiftly enough" P:180
"But in fact there is no shortage of systematic evidence that firms that are "overpriced" by conventional measures have indeed tended to do poorly afterward. Many articles in academic finance journals show this, not by colorful examples but by systematic evaluation of large amounts of data on many firms." P:183
"Stocks that are difficult to short tend to do relatively poorly as investments, as was shown by Stephen Figwelski in 1981. More generally, stocks that are just overpriced by various measures tend to do poorly relative to stocks that are underpriced. Sanjoy Basu found in 1977 that firms with high price-earnings ratios tend to underpreform, and in 1992 Eugene Fama and Kenneth French found the same for stocks with high price-to-book value. Werner De Bondt and Richard Thaler reported in 1985 that firms whose price has risen a great deal over five years tend to go down in price in the next five years, and that firms whose price has declined a great deal over five years tend to go up in price in the succeeding five years. Jay Ritter found in 1991 that initial public offerings tend to occur at the peak of the industry-specific investor fads and then to show gradual but substantial price declines relative to the market over the subsequent three years. Thus there is a sort of regression to the mean (or the longer-run past values) for stock prices: what goes up a lot tends to come back down, and what goes down a lot tends to come back up." P:183
"These findings, and similar findings by many other researchers, have encouraged an approach to the market called "value investing", that of picking portfolios of stocks that are underpriced by conventional measures, on the theory that they have been overlooked only temporarily by investors and will appreciate eventually. The other side of this strategy is to sell overpriced stocks short." P:183
"Another argument that markets are basically efficient, in the most global sense, is merely that stock prices roughly track earnings over time - that despite great fluctuations in earnings, price earnings ratios have stayed within a comparatively narrow range." P:184
"The relation between price-earnings ratios and subsequent returns appear to be moderately strong, though there are questions about its statistics significance, since there are fewer than twelve nonoverlapping ten-year intervals in the 115 years' worth of data. There has been substantial academic debate about the statistical significance of relationships like this one, and some difficult questions of statistical methodology are still being addressed. We believe, however, that the relation should be regarded as statistically significant....long terms investors - investors who could commit their money to an investment for ten full years - did do well when prices were low relative to earnings at the beginning of the ten years and did do poorly when prices were high at the beginning of the ten years. Long-term investors would be well advised, individually, to lower their exposure to the stock market when it is high, as it has been recently, and get into the market when it is low." P:187
"...historically, when prices have been high relative to earnings as computed (using ten year moving average of earnings), the return in terms of dividends has been low, and when prices have been low relative to earnings, the return in terms of dividends have been high." P:187
"It is natural to suppose that when one is getting so much lower dividends from the shares one owns, one ought to expect to earn lower investing returns overall. The dividend is, after all, part of the total return one gets from holding stocks (the other part being the capital gain), and dividends historically represent the dominant part of the average return on stocks. The reliable return attributed to dividends, not the less predictable portion arising from capital gains, is the main reason why stocks have on average been such good investment historically." P:188
"Thus the simple wisdom - that when one is not getting much in dividends relative to the prices one pays for the stocks it is not a good time to buy the stocks - turns out to have been right historically" P:188
"In fact, my article concluded, no movement of U.S. aggregate stock prices beyond the trend growth of prices has ever been subsequently justified by dividend movements, as the dividend present value with constant discount rate has shown an extraordinarily smooth growth plan." P:190
"So the "fact" of the superiority of stocks over bonds is not a fact at all. The public has not learned a fundamental truth. Instead, their attention has shifted away from some fundamental truths. They seem not to be so attentive to at least one genuine fundamental truth about stocks: that they are residual claims on corporate cash flow, available to stockholders only after everyone else has been paid. Stocks are, therefore, by their very definition, risky. Investors have also lost sight of another truth: that no one is guaranteeing that stocks will do well. There is no welfare plan for people who lose in the stock market." P:198
"A fundamental weakness of our free market system is that, especially during boom periods, there tends to be a decline in ethical standards through time, until there is some kind of scandal or crackdown, and then a public and government reaction to the scandal restores standards." P:210
"Traditionally, the rule for evaluating whether a borrower is borrowing too much is that no mortgage loan should exceed 2,5 years' income. But, recently, a widely used standard for home mortgage lending in the United States has been the 28/36 rule: the mortgage payments should be no more than 28% of the borrower's income, and all debt payments should be no more than 36% of the borrower's income. This rule allows mortgage lender to lend more generously when interest rates are low." P:211
"Cost cutting cannot go on ad infinitum. Cost cutting by laying off workers is a controversial move that has a good chance of a political response, such as raising taxes on corporations. It also carries with it the possibility of disruptive pretax earnings in the future. The best way to raise short-run earnings at the expense of longer-term earnings is to lay off one's quality (and expensive) people, substituting others who can keep things going as they are for a while but whose lack of ability will tend to be noticed in the longer run." P:214
"Resentment against the United States and its close allies, and their strong free enterprise system, has moral overtones too; people in many other countries that are not quite as strong economically wonder if their relative lack of economic success might not be due to their greater concern as societies and as individuals with quality, fairness, and human values. If such a moral basis for resentment gains solid ground in public thinking, it could lead to heightened efforts to compete with or exclude international corporations that are seen as American or allied with America." P:214
"Authorities who are responsible for pension plans should come out strongly against over-reliance on the stock market. They should instead recommend greater diversification and suggest that a substantial fraction of balances be put into safe investments, such as inflation-indexed government bonds" P:222
"New institutions or markets should also be created that would make it easier for individuals to get out of their exposure to the stock market. The institutions we have - such as short sales, stock index futures, and put options - are not particularly user-friendly, and most investors do not avail themselves of these. Many investors today feel themselves locked into their stock holdings because of the capital-gains-tax consequences of selling and their inability to find other ways of reducing their exposure." P:228
"People have to be encouraged by experts to understand that true diversification largely means offsetting the risks that they are already locked into. This means investing in assets that help insure their labor incomes, in assets that tend to rise in value when their labor income declines, or at least that do not tend to move in the same direction. The objective can be achieved by tacking positions in existing assets that are found to correlate negatively (or at least less positively) with specific labor incomes." P:229
"The problem is that people in glamorous regions often tend to believe that land prices, already a significant component of home value there, will keep going up and up. Surely, they think, there is some advantage to living in those areas. People do enjoy the prestige of living in an area where celebrities live, and they also benefit from the business opportunities there. It is easy for residents there to imagine that more and more people are thinking similarly, and that they will continue to bid up real estate prices in their city. This is irrational exuberance in the context of real estate". P:24
"But one must remember the implicit dividends that one receives from living in a home, that is, the value of the shelter and other services provided by a home. These dividends are untaxed. It is often said (correctly) that these is a tax advantage to owning rather than renting. If one swapped houses with one's neighbour living in an identical house and each paid rent to the other (so that the rent received would cancel out the rent paid), the transaction would be virtually meaningless from an economic standpoint, but it would incur taxes, since the rent received would be taxable while the rent paid would not be deductible. For this reason, most people are well advised to buy rather than rent the homes they live in." P:25
"Life was simpler once; one saved, and bought a home when the time was right. One expected to buy a home as part of normal living, and didn't think to worry about what would happen to the price of homes. The increasing large role of speculative markets for homes, as well as other markets, has fundamentally changed our lives." P27
"Understanding the factors that precipitate market moves is doubly difficult because the timing of the major market events tends no to be lined up well with the timing of the precipitating factors. The precipitating factors often tend to be medium-term trends that catch the public's attention only after they have been in place for a long time. The timing of specific market events is, as we shall discuss in the next chapter, directly determined by people's reactions to the market and to each other, which impart to the market complex internal dynamics. But we must look at the precipitating factors if we are to understand why the market moves." P:32
Analysts were especially reluctant to makes sell recommendations near the peak of the stock market for a couple of reasons. One reason often given for this reluctance is that a sell recommendation might have incurred the wrath of the company involved, and companies could retaliate by refusing to talk with the analysts whom they viewed as submitting negative reports, excluding them from information sessions, and not offering them access to key executives as they prepare earning forecasts. This situation on the way to the peak of the market represented a change in the fundamental culture of the investment industry, and in the tacit understanding that recommendations are as objective as the analyst can make them.
Another reason that many analysts were reluctant to issue sell recommendations is that an increasing number of them were employed by firms that underwrite securities, and these firms did not want their analysts to do anything that might jeopardize this lucrative side of the business. Analysts affiliated with investment banks gave significantly more favourable recommendations on firms for which their employer was the co- or lead underwriter than did unaffiliated analysts, even though their earnings forecasts were not usually stronger" P:45
"Encouraging longer-term thinking among investors is probably, all in all, a good thing. But an additional effect of 401(k) plans as they are structured today may be to boost demand for stocks further through another psychological mechanism. By offering multiple stock market investment categories for employees to choose among, employers can create demand for stocks. An effect of categories on ultimate investment choices was demonstrated by economists Shlomo Benartzi and Richard Thaler. They found, using both experimental data and data on actual pension fund allocations, that many people tend to spread their allocations evenly over the available options, without regard to the contents of the options. If a pension plan offers a choice of a stock fund and a bond fund, many people will put 50% if their contributions into each. If the plan instead offers a choice between a stock fund and a balanced fund (with say 50% stocks and 50% bond in it), many people will still tend to put 50% into each, even though they are now really putting 75% of their portfolio into stocks.
The options offered as part of 401(k) plans tend to be heavily weighted in favour of stocks. In contrast, most 401(k) plans do not have any real estate options. In this way the growth of 401(k) plans has encouraged the growth of public interest in the stock market relative to the real estate market." P:48
"In 1979 economists Franco Modigliani and Richard Cohn published an article arguing that the stock market reacts inappropriately to inflation because people do not fully understand the effect of inflation on interest rates. When inflation is high - as it was when they wrote, near the bottom of the stock market in 1982 - nominal interest rates (the usual interest rates we see quoted every day) are high because they must compensate investors for the inflation that is eroding the value of their dollars. Yet real interest rates (interest rates as corrected for the effects of inflation) were not high then, and therefore there should not have been any stock market reaction to the high nominal rates. Modligiani and Cohn suggested that the market tends to be depressed when nominal rates are high even when real rates are not high because of a sort of "money illusion", or public confusion about the effects of a changing monetary standard. When there is inflation, we are changing the value of the dollar, and therefore changing the yardstick by which we measure values. Faced with a changing yardstick, it is not surprising that many people become confused.
Public misunderstanding about inflation at the present time encourages high expectations for real (inflation-corrected) returns. Most data on past long-run stock market returns are reported in the media in nominal terms, without correction for inflation, and people might naturally be encouraged to expect that such nominal returns would continue in the future. Inflation today is under 2%, compared with a historical Consumer Price Index level of inflation that has averaged 4.4% a year since John Kennedy was elected president in 1960. Therefore, expecting the same nominal returns we have seen in the stock market since 1960 is expecting a lot more in real returns." P:51
"Many of the major finance textbooks today, which promote a view of financial markets as working rationally and efficiently, do not provide arguments as to why feedback loops supporting speculative bubbles cannot occur. In fact, they do not even mention bubbles or Ponzi schemes. These books convey a sense of orderly progression in financial markets, of markets that work with mathematical precision. If the phenomena are not mentioned at all today, then students are not given any way to judge for themselves whether or not they are in fact influencing the market." P:78
"...high pricing of the market in 1901 was not followed by any immediate or dramatic price decline, but rather that prices ceased to increase and that eventually, after some twenty years had elapsed, the market had lost most of the real value it had had in 1901. The change took so long to work itself out that it is rather more generational in character, and therefore it is hard to find comment about in the media." P:125
"End of new eras seem to be periods when the focus of debate can no longer be so upbeat. At such times, a public speaker may still think that it would be good business to extol a vision of a brilliant future for the economy, but it is simply not credible to do so. One can, at such times, present a case that the economy must recover, as it always has, and that the stock market should go up, as it historically has, but public speakers who make such a case cannot achieve the command of public attention they do after a major speculative market run-up and economic boom. There are times when an audience is highly receptive to optimistic statements, and times when it is not." P:131
"The data on which these tables are based confirm for countries the results first discovered by Warner De Bonds and Richard Thaler: that winner stocks - in winner status is measured over long intervals of time such as five years - tend to do poorly in subsequent intervals of the same length, and that loser stocks - if loser status is measured over equally long intervals - tend to do well in subsequent intervals of the same length" P:142
"Quite possibly, the tendency for individual countries' stock market valuations to grow dramatically and then to be reversed will diminish in the future. With freer capital movement than were possible during the periods covered by the examples in the tables, and with more and more global investors seeking profit opportunities buying undervalued countries or shorting overvalued countries, markets may become more stable. Even so, it is unlikely that these forces will soon eliminate the potential for such movements, particularly infrequent and slow large-country events or worldwide events, for which the attendant profit opportunities are slow and hard to diversify, The possibility of major speculative bubbles, now and in the future, cannot be ignored." P:142
"It has been notes that employees have a tendency to invest in company stock, even though it would appear to be more in their interest to diversify away from the source of their own livelihood...This tendency to invest in company stock can be interpreted as consistent with investors' being influenced by stories: they know many more stories about their own companies and so invest in those companies' stocks.
People also appear to want to construct simple reasons for their decisions, as if they feel the need to justify those decisions in simple terms - if not to others, then to themselves. The need to have a simple reason to explain decision is similar to the need to have a story behind a decision; both the stories and the reasons are simple rationales that can be conveyed verbally to others." P:151
"A fundamental observation about human society is that people who communicate regularly with one another think similarly. There is at any place and in any time a Zeitgeist, a spirit of the times. It is important to understand the origins of this similar thinking, so that we can judge the plausibility of theories of speculative fluctuations that ascribe price changes to faulty thinking. If the millions of people who invest were all truly independent of each other, any faulty thinking would tend to average out, and such thinking would have no effect on prices. But if less-than-mechanistic or irrational thinking is in fact similar over large numbers of people, then such thinking can indeed be the source of stock market booms and busts." P:157
"Another piece of evidence that has been offered in support of the efficient markets history is that professional investors, institutional money managers, or securities analysts do not seem to have any reliable ability to outperform the market once account is taken of transactions costs and management fees. This result may seem puzzling, since once would think that professional investors are more educated about investing, more systematic, than individual investors. But perhaps the results is not too puzzling as it as first seems. Individual investors get advice from professional investors, and they can also observe (albeit with some time lag) what professional investors are doing. So there may be no significant difference between the success of professional investors and the market as a whole, even if their analysis is very valuable to others. Individual investors with substantial resources tend to be educated and intelligent people, too. Moreover, some recent studies have documented that professional analysts' advice is indeed worth something, if it is acted upon swiftly enough" P:180
"But in fact there is no shortage of systematic evidence that firms that are "overpriced" by conventional measures have indeed tended to do poorly afterward. Many articles in academic finance journals show this, not by colorful examples but by systematic evaluation of large amounts of data on many firms." P:183
"Stocks that are difficult to short tend to do relatively poorly as investments, as was shown by Stephen Figwelski in 1981. More generally, stocks that are just overpriced by various measures tend to do poorly relative to stocks that are underpriced. Sanjoy Basu found in 1977 that firms with high price-earnings ratios tend to underpreform, and in 1992 Eugene Fama and Kenneth French found the same for stocks with high price-to-book value. Werner De Bondt and Richard Thaler reported in 1985 that firms whose price has risen a great deal over five years tend to go down in price in the next five years, and that firms whose price has declined a great deal over five years tend to go up in price in the succeeding five years. Jay Ritter found in 1991 that initial public offerings tend to occur at the peak of the industry-specific investor fads and then to show gradual but substantial price declines relative to the market over the subsequent three years. Thus there is a sort of regression to the mean (or the longer-run past values) for stock prices: what goes up a lot tends to come back down, and what goes down a lot tends to come back up." P:183
"These findings, and similar findings by many other researchers, have encouraged an approach to the market called "value investing", that of picking portfolios of stocks that are underpriced by conventional measures, on the theory that they have been overlooked only temporarily by investors and will appreciate eventually. The other side of this strategy is to sell overpriced stocks short." P:183
"Another argument that markets are basically efficient, in the most global sense, is merely that stock prices roughly track earnings over time - that despite great fluctuations in earnings, price earnings ratios have stayed within a comparatively narrow range." P:184
"The relation between price-earnings ratios and subsequent returns appear to be moderately strong, though there are questions about its statistics significance, since there are fewer than twelve nonoverlapping ten-year intervals in the 115 years' worth of data. There has been substantial academic debate about the statistical significance of relationships like this one, and some difficult questions of statistical methodology are still being addressed. We believe, however, that the relation should be regarded as statistically significant....long terms investors - investors who could commit their money to an investment for ten full years - did do well when prices were low relative to earnings at the beginning of the ten years and did do poorly when prices were high at the beginning of the ten years. Long-term investors would be well advised, individually, to lower their exposure to the stock market when it is high, as it has been recently, and get into the market when it is low." P:187
"...historically, when prices have been high relative to earnings as computed (using ten year moving average of earnings), the return in terms of dividends has been low, and when prices have been low relative to earnings, the return in terms of dividends have been high." P:187
"It is natural to suppose that when one is getting so much lower dividends from the shares one owns, one ought to expect to earn lower investing returns overall. The dividend is, after all, part of the total return one gets from holding stocks (the other part being the capital gain), and dividends historically represent the dominant part of the average return on stocks. The reliable return attributed to dividends, not the less predictable portion arising from capital gains, is the main reason why stocks have on average been such good investment historically." P:188
"Thus the simple wisdom - that when one is not getting much in dividends relative to the prices one pays for the stocks it is not a good time to buy the stocks - turns out to have been right historically" P:188
"In fact, my article concluded, no movement of U.S. aggregate stock prices beyond the trend growth of prices has ever been subsequently justified by dividend movements, as the dividend present value with constant discount rate has shown an extraordinarily smooth growth plan." P:190
"So the "fact" of the superiority of stocks over bonds is not a fact at all. The public has not learned a fundamental truth. Instead, their attention has shifted away from some fundamental truths. They seem not to be so attentive to at least one genuine fundamental truth about stocks: that they are residual claims on corporate cash flow, available to stockholders only after everyone else has been paid. Stocks are, therefore, by their very definition, risky. Investors have also lost sight of another truth: that no one is guaranteeing that stocks will do well. There is no welfare plan for people who lose in the stock market." P:198
"A fundamental weakness of our free market system is that, especially during boom periods, there tends to be a decline in ethical standards through time, until there is some kind of scandal or crackdown, and then a public and government reaction to the scandal restores standards." P:210
"Traditionally, the rule for evaluating whether a borrower is borrowing too much is that no mortgage loan should exceed 2,5 years' income. But, recently, a widely used standard for home mortgage lending in the United States has been the 28/36 rule: the mortgage payments should be no more than 28% of the borrower's income, and all debt payments should be no more than 36% of the borrower's income. This rule allows mortgage lender to lend more generously when interest rates are low." P:211
"Cost cutting cannot go on ad infinitum. Cost cutting by laying off workers is a controversial move that has a good chance of a political response, such as raising taxes on corporations. It also carries with it the possibility of disruptive pretax earnings in the future. The best way to raise short-run earnings at the expense of longer-term earnings is to lay off one's quality (and expensive) people, substituting others who can keep things going as they are for a while but whose lack of ability will tend to be noticed in the longer run." P:214
"Resentment against the United States and its close allies, and their strong free enterprise system, has moral overtones too; people in many other countries that are not quite as strong economically wonder if their relative lack of economic success might not be due to their greater concern as societies and as individuals with quality, fairness, and human values. If such a moral basis for resentment gains solid ground in public thinking, it could lead to heightened efforts to compete with or exclude international corporations that are seen as American or allied with America." P:214
"Authorities who are responsible for pension plans should come out strongly against over-reliance on the stock market. They should instead recommend greater diversification and suggest that a substantial fraction of balances be put into safe investments, such as inflation-indexed government bonds" P:222
"New institutions or markets should also be created that would make it easier for individuals to get out of their exposure to the stock market. The institutions we have - such as short sales, stock index futures, and put options - are not particularly user-friendly, and most investors do not avail themselves of these. Many investors today feel themselves locked into their stock holdings because of the capital-gains-tax consequences of selling and their inability to find other ways of reducing their exposure." P:228
"People have to be encouraged by experts to understand that true diversification largely means offsetting the risks that they are already locked into. This means investing in assets that help insure their labor incomes, in assets that tend to rise in value when their labor income declines, or at least that do not tend to move in the same direction. The objective can be achieved by tacking positions in existing assets that are found to correlate negatively (or at least less positively) with specific labor incomes." P:229
