Risks Worth Taking

Jim Parker of Dimensional Fund Advisors recently wrote a column on the proper approach to risk, as it applies to investing. To me it’s all common sense, but that sometimes is in short supply, just when you need it the most!  Read on to see if you agree.

A wise man once said that to profit without risk and to experience life without danger is as impossible as it is to live without being born. That all may be true, but which risks are worth taking and which are not?

The fact is even the most self-declared risk-averse people take risks every day. There are routine risks to our safety in crossing the road, in riding public transport, in exercising at the gym, in choosing lunch and in using electrical equipment.

Then there are the “big decisions” like selecting a degree course, choosing a career, finding a life partner, buying a house and having children. These are all risky decisions, all uncertain, all involving an element of fate.

In making these decisions, we seek to ameliorate risk by carefully weighing up alternatives, researching the market, judging possible consequences and balancing what feels right emotionally and intellectually, both in the short term and in the long.

Sometimes, we ask an independent outsider to guide us in making our decision. They do this by providing an objective assessment of the potential risks and rewards of various alternatives, by taking a holistic view of our circumstances and by keeping us free of distraction and focused on our original goals.

In investment, this is the value that a good financial advisor can bring—not only in understanding risk and return and how to build a portfolio but in knowing the specific needs, circumstances and aspirations of his or her individual client.

Quite simply, many people who invest without the help of an advisor take risks they do not need to take. They gamble on individual stocks, they rely on forecasts, they chase past returns, they fail to rebalance their portfolios to take account of changing risks and they run up unnecessary costs and tax liabilities.

To use an analogy, this is like trying to cross an eight-lane highway in the face of heavy traffic when there is a pedestrian bridge a little way down the road. You may well get to your destination safely through the traffic, but it will be despite your actions rather than because of them. Understanding risk in investment begins with accepting that the market itself has already done a lot of the worrying for you. Markets are highly competitive, which means that new information is quickly built into prices. Instead of trying to second guess the market, you work with it and take the rewards that are on offer.

Your biggest investment is in spending time with an advisor building a diversified portfolio designed to meet your long-term requirements, then meeting them periodically as your needs change and to ensure you are still on course.

In considering all of this, it is important to understand that risk can never be totally eliminated. If there were no risk, there would be no return. But your chances of a good outcome are far greater if you use the accumulated knowledge of financial science and the guiding hand of an advisor who knows you.

To sum up, risk and return are related. But not all risks are worth taking. The process of working this out starts with not trying to do it all alone.

The Stock Market Declined, Now What?

“Don’t let short-run fluctuations, market psychology, false hope, fear, and greed get in the way of good investment judgment.” – John Bogle.

Last week I was contacted by Sarah Morgan, a writer for SmartMoney.com, who had some questions about the recent volatility and decline in the stock market.  Normally, I don’t respond to the press, but her initial question struck me to my core.  Ms. Morgan wanted to know if clients were panicking.  My clients?  Panicking?  She obviously did not know me or my investment philosophy.  My email response to her was this, “I would take it as a tremendous failure of education and preparation if my clients were panicking now.”  

I went on to say that in trying to time the market (which, as I’ve said before, is patently impossible) investors are more likely to hurt themselves by not being invested when the rebound comes.  And, as historical data prove, there is always a rebound, because the long-term trend is up.

I admit that I took pride in being able to tell Ms. Morgan that clients of Key Financial Solutions do not panic.  Rather, they sit and hold tight and ride out the roller coaster.  They’re prepared for short-term fluctuations and declines, simply because they have a long term plan.

Their Investment Policy Statement specifies a well-balanced portfolio that includes a combination of stock mutual funds and bonds (in ratios that we have decided upon, based upon time horizon, risk tolerance, etc.).  So, even a 10% decline in the stock market has little effect on my clients.  And should a market decline be steep enough to affect a portfolio, rebalancing – selling some (appreciated) bonds and buying some (now, underweight) equities – is appropriate to reestablish the portfolio’s target mix.     

That information was enough to spur a half-hour long phone conversation and a follow-up email. 

It was gratifying to read the article, After Market Slide, What’s Your Next Move?, and not just because I was quoted.  No, I was happy to see that Ms. Morgan got it right. She quoted a number of people who said that long-term investing is the key to success.

Having a well thought out Investment Policy Statement is the best chance I know of to stick with a long-term plan.  When markets experience extreme volatility, it sure helps to have a strategy that is based on more than a prediction of what today’s news means to your investment portfolio.

And what are the rewards of long-term investing versus the risk of getting out of the market?  Christopher Davis of Davis Advisors gave a presentation at the NAPFA (National Association of Personal Financial Advisors) National Conference.  Here is what he reported.

Average Annual Returns for 1995 – 2009 for investing in the S&P 500

8.0%		for Staying the Course
3.2%		if you missed the 10 best days
-2.6%		if you missed the 30 best days
-9.2%		if you missed the 60 best days

 

For a fifteen year period, if you missed the 30 best days, you could have managed to lose 2.6% per year, versus earning 8.0% per year.  Thirty days in 15 years!

So let me turn the original question on its head, “Why would anyone risk being out of the stock market?”

I Told You So!

“Stock picking and market timing are expensive, risky, and ultimately futile exercises.” – William Bernstein.

As you may recall, on Friday, March 6th I wrote that it was a mistake to be scared out of the stock market.  The stock market actually hit its bottom on the next business day, Monday, March 9th.  Since then, prices have soared, not in a perfectly straight line, true, but the increases have indeed been spectacular.

What does that mean?  That I can predict stock market prices?  No, absolutely not.  That remains an “unacquired” skill.

What it does mean, though, is that I follow a buy and hold philosophy, because getting out of and into the stock market again and again is a losing strategy, simply because you are not going to do it well.  One benefit of working with a fee-only financial advisor is avoiding the emotional swings that accompany volatile stock prices.

Please read my March 6th post, Nobody is Buying Stocks?  in which I mocked the total negativity that was seemingly everywhere in the media.  I pointed out just how overblown the language used at the time was:

“With so much uncertainty, investors are parachuting out of companies…”

“No one is taking a back-seat approach. Everyone is just selling.”

“It’s like an unending nightmare.”

Please take a moment to read the entire post (if you haven’t already), but here is the conclusion if time is pressing:

“No one knows what tomorrow will bring, but unless capitalism ceases to function, stockholders will be rewarded in the long term for owning stocks and for taking risks. Yes, there is risk in owning stocks, as we have recently experienced. Since we’ve already seen the risk, how about staying around for the reward?

An old Wall Street proverb is that “Nobody rings a bell at the top or the bottom of a market.”

Are you waiting for that bell to ring?  Don’t.”

As I pointed out, since March 9th stock prices have soared.

Understand, though, stock prices can go down again.  In fact, I can  guarantee that.  Once again, I am not clairvoyant, and I rarely make predictions.  But, I have counseled a buy and hold strategy for many years. There is no evidence that anyone can get in and out of the market at the right time and improve on a buy and hold approach.

Heaven help the person who got out of the market earlier this year.  The March 6th post quoted financial advisor Bijon Mishras who said, “I want to wait for a firm turnaround, and be as safe as possible.” I wrote, “Whoa, Nelly. Remember this quote and see how it turns out.”  So, Bijon, is now the time to get back in?

On March 16th I wrote a series which started with Is Buy and Hold Not Working? Part 1.  I said that timing the market was impossible, “The evidence shows that most investors get it wrong over and over again.”

“Historically, stock markets have had sharp increases following a bear market.  The difficulty is identifying when that move is for real.  Bear market rallies, bear traps, etc. tend to keep investors gun-shy, so a sustainable bull market rally will only be identifiable in hindsight.

Nevertheless, individuals who keep their investments in cash or Money Market funds will miss out on most of the move.”

Conclusion

I’ll stick with what I said on March 27th, “Given what does not work, what is the recommended approach?  In my opinion, it is a diversified, low cost, buy-and-hold portfolio matched to your time horizon and risk tolerance.”

A good advisor should help you do that and also avoid the “big mistakes” of buying high and selling low.  Is that worth the annual amount you pay a fee-only advisor?  I certainly think so.  Do the math.

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Why Attempt to Forecast the Stock Market?

Everyone wants to know which way the stock market will be headed. Yet, most people say that they are investing for the long term. Why then do so many people have this fascination with predicting the future? What difference will it make? Maybe they are control freaks, or have some other psychological issue?  Personally, I think it’s because this is what investors have been taught will determine a successful investment program.

In any case, the question seems to come up frequently at social gatherings, “Is this a good time to invest in stocks?” Often, friends will repeat to me a forecast that they have heard. For example, three months ago an officer of a non-profit organization told me her stockbroker said that the Dow Jones would be going down to 7,200; at the time, the Dow was about 7,800. (Wow, I thought, a clairvoyant stockbroker.) As it turns out, his prediction came true. But really, how useful was that prediction, given that the Dow Jones Average is now above 8,400?

Market Timing

More recently, two friends were engaged in a conversation about the direction of the stock market.

One friend had determined that it was a “good time to buy” and had acted accordingly. The second friend had reached the opposite conclusion, saying that the market was “overbought” and he expected a pullback. He had actually “taken some profits” by selling some positions, and he had, in addition, sold short two stocks that he thought would be going down. (Selling short is a way to profit from a decline in a security.)

Clearly they disagreed, and very probably only one would turn out to be right. When asked why I remained mum on the subject, I simply replied that I don’t do forecasts.

Now, back to the original question of “Why Attempt to Forecast the Stock Market?” Well, perhaps as a result of the wild ride we all recently “enjoyed” in the stock market, it’s difficult not to try. From a high on October 9, 2007 to the current market bottom of March 9, 2009, the S&P 500 went down almost 57%. This is the sharpest decline since the Great Depression. Since March 9th, though, the S&P 500 has climbed by about 35%.

Wouldn’t it be great if we could have timed those market swings? As I’ve written in the past, although it would be very nice, it is also virtually impossible. Of course, we keep trying. And some people have placed mistaken confidence in “experts” who seem to know what they were talking about.

The problem is, of course, that market gurus frequently disagree. And choosing one simply because he was recently correct in his predictions could be a big mistake, since there is little consistency in making good forecasts.

Long-Term Investing

I would argue that since no one knows what the short-term direction of the stock market will be, it is a mistake to base your investment philosophy on such predictions. Moreover, it is not necessary to predict the future to have a successful investment experience.

If we really are long-term investors, the only way to benefit from growth in the economy is to invest in equities, which are, in fact, ownership interests in corporations. This doesn’t by any means imply that we should only invest in stocks or stock market mutual funds.

But to ignore the basic difference between a fixed income investment, such as a money market mutual fund, CD, or a bond and equity investments is a major mistake. Fixed income investments have a limited, although more predictable, return. Stocks have higher expected returns, but there is more uncertainty as to just what they will be.

Risk and Return

Why do stock investments have a higher expected return than fixed-income investments? Because they have higher risk. Risk and return are two sides of the same coin.

Nobel Prize winning economist William Sharpe summarized it quite well when he talked about the essence of his award winning research and how risk and return are related. “The bottom line: Yes, Virginia, some investments do have higher expected returns than others. Which ones? Well, by and large they’re the ones that will do the worst in bad times.” (Emphasis added.)

This may sound like a flippant remark, but it is the truth. I think, unfortunately, many people have forgotten the word “expected.” When talking about stock market returns, we got so used to hearing that stocks were superior investments in the long-term, that we forgot about risk. No one ever said that “expected” returns would be “realized” returns, though it seems a lot of people jumped to that conclusion.

A couple of months ago, I thought that some people were unfortunately panicking out of stocks. Their approach was to “go to cash and wait for things to sort themselves out.” Based on past experience, I was concerned  that these frightened investors would miss out on the inevitable recovery. Although no one knows if the stock market did hit its bottom in March, as of now, it was a mistake to have gotten out of the market.

My advice for long-term investors remains the same: To choose carefully an appropriate allocation of stocks and bonds, which depends on your time horizon and your need and your willingness to accept the risk.

After that, you need to diversify properly, keep fees and other costs down, and be aware of taxes. Then follow a buy and hold philosophy, with appropriate rebalancing to your target allocation.

Warren Buffett has famously said that investing is “simple, but it’s not easy.”

What Should Investors Do Now?

“No one knows anything.”

“There is a science to investing.”

Given the market volatility and the steep declines of the last year or so, which quote would you agree with?

My answer is that I agree with both statements.  Here’s why.

Absolutely no one can successfully predict the short term direction of the stock market, the value of the dollar or gold, the movement in interest rates, etc., etc. When it comes to investing, there is no magic formula. There are no gurus who can foretell the future and help you “beat the market.”

On the other hand, there are approaches that work very well in the long term. For example, there is a fundamental relationship between risk and (expected) return. Ignore it at your own peril.

And you can learn from the past; you can devise a sensible strategy. Most of all, by following a long term buy-and-hold approach with a diversified portfolio that is matched to your risk tolerance, you can avoid the big mistakes of being too optimistic or too pessimistic.

For a thorough presentation on the intellectual underpinnings of a buy-and-hold approach and what investors should consider as they move forward, I highly recommend the video, What Should Investors Do Now? by Weston J. Wellington of Dimensional Fund Advisors.

This multi-part presentation includes “an examination of capital markets, the effects of recession and government policy on stock prices, how the current market stacks up to previous downturns, and the reasons why our core beliefs have not changed in light of these events.”

If you hold an MBA in Finance, you’ll find this video to be a valuable review of capital markets and portfolio management. If, like most people, you’re merely an ordinary investor, one just trying to figure things out, this will be an extremely useful introduction to the evidence that supports a sensible  long- term approach to investing.

So, grab a cup of coffee or tea, then sit back and enjoy the show. It is over an hour long, but you can view it in segments.

Watch it here.

Brawl Street: Jon Stewart vs. Jim Cramer

The Daily Show With Jon Stewart	M – Th 11p / 10c
Jim Cramer Unedited Interview Pt. 1
thedailyshow.com
Daily Show Full Episodes Economic Crisis Political Humor

I’m not a fan of the financial advice dispensed by CNBC’s talking heads. The “advice” is contradictory, often based on someone’s guess, and certainly not geared to your individual situation.

I find Jim Cramer, of Mad Money, particularly difficult to watch, and it’s not just the bombast. I believe that none of his recommendations make any sense. He is telling viewers which stocks will do well and which will do poorly, which is impossible to do.

Guessing which stocks to buy is not investing; it’s speculating. The public needs to understand that. So I was pleased that Jon Stewart of the Daily Show took Cramer to task. Since I believe that Jim Cramer’s infotainment gives viewers the absolutely wrong framework for successful investing, I think he got off easy.

ABC This Week with George Stephanopoulos had a roundtable discussing, among other things, whether CNBC fell down on the job covering the financial and business world.

Right at the end of the session, George Will nailed the real issue with his general rules in life.

• Don’t play poker with a man named Slim.
• Don’t buy a Rolex from someone who is out of breath.
• Don’t take financial advice from people who are shouting.

Amen.

CNBC Financial Advice

The Daily Show With Jon Stewart	Mon – Thurs 11p / 10c
CNBC Financial Advice
www.thedailyshow.com
Daily Show Full Episodes Political Humor Healthcare Protests

Last week Jon Stewart of the Daily Show ridiculed the usefulness of financial predictions made on some CNBC shows.  Stewart exposed the theatrics and general silliness of many CNBC commentaries, not to mention the shameful sucking up to CEOs.

Remember that the Daily Show is on Comedy Central, so have a good laugh. This is not meant to be fair and balanced.

Yes, CNBC has had some very good interviews with the likes of investor Warren Buffet, author John Bogle and PIMCO executive and author Mohamed El-Erian. But remember that many CNBC shows are essentially infotainment; they are meant to keep you watching so that CNBC can sell ads.

By the way, keep watching the show to see a humorous but also enlightening interview with New York Times columnist Joe Nocera.

Searching for a Better Investment Guru

U.S. stocks declined yesterday to the lowest prices in more than 12 years. The Standard and Poor’s 500 closed at 700. You would think that now would be a very good time to have a reliable investment guru offer sage advice and words of wisdom. Times are tough, the economy is tanking and there is panic in the streets (Wall Street and Main Street, both). What is an investor to do? Should she buy, sell, hold? “Surely,” you think, “the ‘experts’ must know.” Unfortunately, you’d be thinking wrong; the correct answer is that he or she really doesn’t.

Last month, in an article titled Why the Experts Missed the Crash, Money Magazine published an interview with UC Berkeley Haas Business School professor Philip Tetlock. The professor has spent his career evaluating experts and authorities in a variety of fields, and he is not at all surprised that the vast majority of financial “gurus” failed to predict the recent steep market decline.

Here is a summary of the article:

Despite everything, we can’t shake the belief that elite forecasters know better than the rest of us what the future holds.

The record, unfortunately, proves no such thing. And no one knows that record better than Philip Tetlock, 54, a professor of organizational behavior at the Haas Business School at the University of California-Berkeley. Tetlock is the world’s top expert on, well, top experts. Some 25 years ago, he began an experiment to quantify the forecasting skill of political experts.

Tetlock has analyzed “not just what the experts said but how they thought: how quickly they embraced contrary evidence, for example, or reacted when they were wrong. And wrong they usually were, barely beating out a random forecast generator.”

Why did so many experts miss the economic crash?

The people intimately involved in packaging [financial derivatives like] CDOs must have had some sense that they were unstable. But their superiors seem to have been lulled into complacency, partly because they were making a lot of money very fast and had no motivation to look closer. So greed played a role.

But hubris may have played a bigger one. … In this case the biggest source of hubris was the mathematical models that claimed you could turn iffy loans into investment-grade securities. The models rested on a misplaced faith in the law of large numbers and on wildly miscalculated estimates of the likelihood of a national collapse in real estate. But mathematics has a certain mystique. People get intimidated by it, and no one challenged the models.

Money has written about human mental quirks that lead ordinary folks to make investing mistakes. Do the same lapses affect experts’ judgment?

Of course. Like all of us, experts go wrong when they try to fit simple models to complex situations. (“It’s the Great Depression all over again!”) They go wrong when they leap to judgment or are too slow to change their minds in the face of contrary evidence.

An Alternative to Finding a Better Forecaster

A good part of the article explores the question “What makes some forecasters better than others?” Professor Tetlock has a detailed answer, which makes interesting reading. He recommends looking for “self-critical, eclectic thinkers who were willing to update their beliefs when faced with contrary evidence, were doubtful of grand schemes and were rather modest about their predictive ability.”

But my answer to the same question is radically different. I believe that it is futile to rely on gurus who have been right more often than others. Various “experts” will be right or wrong at different times, and you cannot, regrettably, know in advance when that will be. So if in essence, the future is unknowable, and experts are so unreliable, you need to have a strategy that does not depend on “accurate” forecasts.

No one, yes no one, knows how markets will behave in the short term. Accordingly, my recommended approach has been and continues to be a disciplined long-term strategy. To understand why, it is absolutely necessary to have perspective on financial history:

• There have been many financial crises in the past; none have proven fatal.
• We have experienced a dozen other Bear Markets since World War II.
• Stock prices have rebounded from all previous declines, even steep ones.
• The stock market goes up in roughly 3 out of every 4 years.
• Stock market losses are temporary; stock market gains are permanent.

Furthermore, waiting for the “right time” to invest doesn’t work for most people, most of the time. The likelihood is that you will miss out on the really strong rebounds that happen when you least expect them. In other words, don’t wait until it looks safe to invest in stocks.

Accordingly, I leave forecasting to the “experts” who according to Professor Tetloc “barely beat random guesses – the statistical equivalent of a dart-throwing chimp – and proved no better than predictions of reasonably well-read nonexperts.”

I do believe in controlling what I can:

• Costs (through low cost mutual funds)
• Risk (through global diversification and sensible asset allocation).

I believe in staying the course so as to participate in the eventual and inevitable recovery.

In short, I do not have a forecast; I have a philosophy and an approach. It’s not perfect, nothing in this world is, but experience shows that it works better than any other approach.

Financial Planners’ Reflections on 2008

I recently attended a meeting of financial planners in Northern New Jersey. Ordinarily, we meet once a month to listen to presentations given by experts on a variety of topics such as insurance, portfolio management and estate planning. This time, though, our group met specifically to discuss the recent upheaval of the stock markets and how that has affected, not just our clients, but us. (It’s been a very stressful year for planners.)

The members of our group are very experienced, individually and collectively, and they take financial planning and investment management very seriously. The consensus was that almost everyone has been adversely affected in some way or another by this year’s stock market decline. “It’s been a humbling experience,” said one planner.

Some members of the group expressed dissatisfaction with various mutual fund managers. Others revealed that they have revised their asset allocation recommendations, according to their changed outlook for various asset classes.

Here are some observations of general interest:

A great many people are genuinely frightened about the current economic situation, perhaps because the media continuously emphasizes the bad news. Some clients believe, rightly or wrongly, that the bad news will likely continue and things will probably get worse.

As various Wall Street industry icons went out of business, some clients became concerned about the financial stability of their custodians and Money Market accounts. Fortunately, planners were able to reassure their respective clients about these issues.

Planners are referring to 2008 as a “black swan” event, a comparison drawn from the book, The Black Swan: The Impact of the Highly Improbable  by Nassim Taleb.

While diversification is a valuable strategy in a typical year, 2008 has been anything but typical. As one participant said, “Diversification works over time, but not every time.”

While 2008 was a very difficult year, it was not totally unprecedented. Planners with long memories looked back to 1973 – 1974 and 1987 for some solace. Those were also difficult times, but we got through them.

All planners agreed that it was time to revisit their clients’ Investment Policy Statements and their personal financial plans.

One planner admitted to being right about one issue (investing in commodities), but not necessarily for the right reasons. (It was that kind of year.)

Naturally, the Benard Madoff mess came up. Providentially, the clients of only one manager were affected, and then, only by a very small amount. In this particular case, diversification definitely paid off.

Special concern was expressed for those individuals who have recently retired or are just about to retire. The markets may not recover in time enough for these people to fully and thoroughly enjoy what is supposed to be their golden years. As these retirees draw down funds, they will have less and less available to keep invested for the eventual rebound which most people expect. Various strategies were discussed for retirees.

Some technical issues were discussed such as Roth conversions, tax loss harvesting and the best strategies for rebalancing, when markets are volatile and people are worried.

One planner expressed concern about municipal bonds, since many states are under heavy fiscal and financial pressure.

The group consensus was this: We will all be very relieved to say goodbye to 2008.

Investment Guru Predicted Crash

“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.

In my previous post, one of the individuals quoted was Jeremy Grantham, a very successful money manager, who has been getting a great deal of media attention lately. He was among the “Fortune Tellers” featured in New York Magazine’s December 7th article, Oracles of Doom.

In addition, late last month, Grantham was the sole guest on PBS’s popular investment program, Consuelo Mack: WealthTrack. She described him as a modern-day “Cassandra,” noting that he predicted today’s depressed stock prices a decade ago.

I might be in the minority here but, in my opinion, being pessimistic 10 years in advance isn’t all that useful.

Now, don’t get me wrong, I think Grantham is very intelligent and quite eloquent. He’s also very convincing. The problem I have with him is that he has been bearish for so long, that eventually, he had to be right.

You can read more about his prophesies in Here Comes the Crash, an article published in the November 15, 2004 Fortune magazine.

Talk to Jeremy Grantham about the stock market, and you get the impression the sky is about to fall. For years the chairman and chief strategist of money-management firm Grantham Mayo Van Otterloo has been gleefully rattling listeners’ nerves with his claim that the excesses of the dot-com bubble still haven’t been unwound and that the market is headed for another precipitous drop. About a year ago his prediction became alarmingly specific. Shortly after this year’s election, he says, the market will sink into a “black hole,” losing about a third of its value over the next two to three years. He sounded this warning most publicly at the annual Morningstar investment conference in July. In late October, speaking from his elegant Boston townhouse, he told FORTUNE, “We’re still in the unraveling of the greatest bull market in American history.”

To be fair, from what was printed in the Fortune article, he has been right:

Using GMO’s computer models, he has made several well-timed calls. In 1982, with stocks selling at fire-sale prices and the economy recovering, he predicted the market was ripe for a “major rally.” That year the U.S. market kicked off its longest bull run ever. He also called the top of the Japanese bubble in 1989, the resurgence of U.S. large caps in 1991, and the rallies in U.S. small-cap and value stocks in 2000.

But, he has also been wrong:

He turned bearish on U.S. equities in the mid-1990s, prompting clients to shift money to other firms.

His prediction in 2004 was that “The low will come two or three years from now, at a level below 700 on the S&P.” That’s not what happened at all. In fact, the S& P 500 went up in 2003, 2004, 2005, 2006 and 2007. Finally, in 2008, his pessimism paid off.

A web site from CXO Advisory Group rates investment “gurus.” According to them:

Jeremy Grantham has been persistently very negative about the prospects for U.S. equities (apparently since 1994), but not for international equities.

Based on subsequent stock market performance and our judgments about his forecasts for overall stock market direction, Jeremy Grantham’s forecast accuracy rate is 48%, which is about average. His forecast sample size is very small, as is our confidence in this score.

Note that carefully: 48%. One could argue that an accuracy rate of 48% is not dissimilar from simply using a coin tossed in the air to determine your prediction.

Finally, if the stock market had gone up this year, I doubt that Jeremy Grantham would be getting this much favorable press.

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