Irrational Exuberance¹
Irrational Exuberance is a terrific book. The author, Robert Shiller is an economics professor at Yale and a leading authority on the economics of financial markets. Irrational Exuberance is based on extensive research (46 pages of notes and references), backed up by years of experience and full of wise counsel. If you have substantial money invested in the market, you must read this book as soon as possible.
Irrational Exuberance is on the New York Times best seller list. It was reviewed there on May 7 and also in Barron's (May 1^st and May 8th) and in the Washington Post. You can get an excerpt from this text at this URL: (cursor down a few books to it)

http://www.canoe.ca/MoneyBooks/

In Irrational Exuberance, "Mr Shiller looks carefully at the factors-structural, cultural and psychological-that have powered Wall Street to its recent levels."* Irrational Exuberance "is concerned not with proving that the market is overvalued-given the numbers, Mr Shiller regards that as self-evident-but with explaining how it all happened. Within those limits, the book is first-rate."*

Robert Shiller's research suggests " that the present stock market displays the classic features of a speculative bubble: a situation in which temporarily high prices are sustained largely by investor's enthusiasm rather than by consistent estimation of real value. Under these conditions, even though the market could possibly maintain or even substantially increase its price level, the outlook for the stock market into the next ten or twenty years is likely to be rather poor-and perhaps even dangerous"
If you are not yet convinced that the market is going to pay far, far smaller returns (capital gains + dividends) to investors over the next ten years, say, than they have over the last ten, go to a book store, find Irrational Exuberance, look at Professor Shiller's graph on page 8. This chart plots the price-earnings ratio, monthly, from January 1881 to January 2000. The numerator is the real (inflation-corrected) S&P Composite Stock Price Index. The denominator is the moving average over the preceding ten years of real S&P Composite earnings. The price-earnings ratio goes up when stock prices rise faster than profits. There were peaks in 1901, 1929 and 1966, the high points of previous booms. These were followed by long, precipitous declines, each lasting a decade or more before the line finally climbs up toward the next boom. The latest upturn began in the early 1980's and took off in the 90's. The price-earnings line is now far above previous peaks. Shiller computed the average real return in the stock market (including dividends) in the five years following the peaks of 1901, 1929 and 1966. Respectively, the market returns were 3.4% -13.1% and -2.6% per year. The ten year returns after the same peaks were 4.4%, -1.4% and -1.8% per year.

Return confined to dividends only
In his last chapter, Professor Shiller makes a point that I had not thought of in quite the way he put it. "If the precipitating factors (Shiller outlined 12 of them in Chapter 2) continue to support the market at its recent record level, and do not increase the market's value any further, then returns in the stock market will be confined to dividends. Since the dividend-price ratio in the U.S. stock market has been only above 1% recently, given stable market levels, stock market returns would be limited to 1% per year - a very poor return indeed."
This statement does not concern me in the least. Investors who purchased dividend-paying common stock years ago and have, through dividend growth, obtained a much higher yield, will continue to reap a substantial benefit from the dividends common stocks pay. Because stock prices fall, it does not follow that dividends will fall. Shiller's research dug up these numbers which should reassure dividend lovers: "between the stock market peak in September 1929 and the bottom in June 1932, when the stock market fell 81% as measured by the real S&P Index, real dividends fell only 11%. p.183

What should investors do now?
To the question of what should investors do now, Robert Shiller offers this guidance:
180 In Chapter 9 on page 180, Shiller addresses value investing directly and concludes by saying: "The characteristic strategy of value investors is to pull out of overvalued individual stocks, but not to pull out of the market as a whole when it appears to be overvalued."(I like this idea best.)
215 "The natural first step may be, depending upon current holdings and specific circumstances, to reduce holdings of U.S. stocks. Certainly, the commonsense notion that one should not be overly dependent on any one investment is as true now as ever. One should at the very least diversify thoroughly." In a related statement on page 12, Shiller says "Long-term investors would be well advised, individually, to stay mostly out of the market when it is high, as it is today..."
216 "Individuals should consider increasing their savings rates."
218 "...shift their retirement funds into bonds..." Shiller likes inflation-indexed bonds. "these bonds have recently been yielding about 4% a year and are riskless."217


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Comment ( from April 2000 TCReport with slight revisions)
This being said, there is little reason for those of us who own high yield stock purchased years ago to worry. Return, by definition, remember, includes capital gains and yield. For most investors, capital gains will evaporate now that the bubble has burst. We own good solid companies purchased at reasonable prices. Beside the negative returns of mutual funds and the markets over the next few years, our yield on cost, just the yields, will look terrific. For instance, with dividend growth, the yield on our BC Gas purchased in the spring of 1995 at $14 is now some 9%². (dividend was 90¢: now it's $1.24) And, faced with negative returns (read: capital losses), investors will demand higher dividends. Stock buy-backs will be curtailed and the money put where it belongs: dividends, the solid return on common stocks. (I noticed recently that Dofasco, after venturing into buy-backs, has increased it dividend) We'll profit from that trend too.

¹ Irrational Exuberance by Robert Shiller, Princeton University Press, 282 pages $U.S. 27.95
* The Economist, March 25^th 2000 p.84