The Cloudy Crystal Ball, Part 4

“There will always be someone predicting disaster and someone predicting great fortune. At one time or another, each will be closer to correct than the other. But it won’t matter to you if you understand this and have invested responsibly. You have a long-term plan; stick with it.” – Peter Lynch.

A Recipe for a Beguiling Article

Creating a recipe for a column about the predictions of market gurus is an interesting task. You need people with a good track record, with different takes on which way the market is going. And most of all you need colorful language and good quotes.

As a recent example, take Jonathan Burton’s article in MarketWatch, The Four Horsemen of the Market: Heed the sobering investment advice of these veteran money managers.

Perhaps calling them “Four Horsemen” is a bit heavy on the sauce, but Burton serves up quite a dish. This particular column calls for two parts pessimism and a cup of caution. Add a dash of optimism for balance. Voila, a prediction column! And it really does not matter if the investment strategists are right about predicting the future. In a few weeks, get some new “experts” with different opinions. The recipe stays the same; only the ingredients change.

Well, if nothing else, the money managers certainly provide interesting, “insightful” analysis and very colorful quotes! But since they disagree on the best strategy, I am not sure how you could “heed” these “experts.” You would certainly get indigestion. I definitely do not recommend that you accept their market timing approach, or anyone else’s for that matter. A previous post explains why investing in the equity market should not be dependent on a prediction of the short-term direction of equity prices.

A Gaggle of Gurus

In any event, here are some of the best quotes:

Jeremy Grantham is “Officially scared.”

“The fundamentals have turned out to be worse than I had thought,” Grantham said. “My advice would be, don’t take any risk.”

“I underestimated in almost every way how badly economic and financial fundamentals would turn out,” Grantham wrote shareholders in a July letter. “Events must now be disturbing to everyone, and I for one am officially scared!”

John Hussman says, “Stay defensive.”

“The stock, bond and foreign-exchange markets continue to trade essentially on the theme that the global economy is weakening, but that the U.S. has dodged a recession,” Hussman wrote in his weekly market commentary in late August.

Investors’ consensus is mistaken, Hussman contends. He said the U.S. is mired in recession, and once investors realize that earnings expectations are overblown, stocks will take another major hit.

“The potential downside could be abrupt, leaving little opportunity to make defensive changes after the fact,” Hussman wrote.

Bob Rodriguez is on a “Buyer’s strike”
He declined to be interviewed for the article but was described as continuing “to focus on caution and capital preservation.”

Steve Leuthold is “Pretty positive.”

Like Hussman, Leuthold is convinced that the U.S. economy is in recession. But he points out that the stock market typically bottoms around the midpoint of the downturn. By his reckoning, the economy entered recession toward the end of 2007, and the extensive valuation criteria he uses tell him there’s now light at the end of the tunnel.

“The bottom has been made,” Leuthold said. “The economy is going to start showing some positive signs sometime in the first half of 2009.”

So he’s getting in early, loading up on shares of biotechnology and alternative-energy companies in particular, and keeping a modest amount in oil drillers and natural gas producers.

Conclusion

These “experts” disagree, which is not surprising. There is no evidence that anyone can predict the course of the market. So let’s face it: No one knows whether, in the short term, the stock market will sink or soar. But we do know that the long term trend has been up for stock prices.

Judging by his recent column on how to evaluate 401(k) choices, Jonathan Burton is a very good journalist. But this “prediction” column does not serve his readers well. It fosters the mistaken belief that in order to be a successful investor you need someone to predict the future for you. That’s just not true.

It is not necessary to try to predict market prices, since a buy-and-hold approach works quite well over the long term. Now that’s a recipe for success.

It just doesn’t make for a very scintillating column.

Buy and hold is a very dull strategy. It lacks pizzazz and doesn’t inspire much admiration at cocktail parties. It has only one little advantage: It works, very profitably and very consistently. – Frank Armstrong