The Cloudy Crystal Ball, Part 5

“The only way to make money with a (market timing) newsletter is by selling one.” - Malcolm Forbes.

Market-Timing Newsletters

No one can accurately predict the short term direction of the stock, bond, oil or any other market, but you can do quite well by charging money for those predictions. Many people buy newsletters that will help them to determine whether or not now is “a good time to invest.” Let me ask you, if you were able to do that, predict the markets accurately and consistently, would you share that extremely valuable information?

Yes, newsletter writers are very convincing, whether they quote economic reasons or technical factors based on the internal dynamics of the stock market. Yes, they use data and systems that you don’t have access to or wouldn’t understand unless you had taken classes to learn them. They talk about or refer to chart patterns, oscillation, On-Balance Volume, etc.

Oh, they speak with great conviction. And when they are wrong (and they are often wrong), they write convincingly why that happened the way it did. They may place the blame on their “system” or their (mis)interpretation of their system. Great stuff.

In fact, thousands of people subscribe to such predictive newsletters. There’s even a paid service that evaluates the newsletters for you, The Hulbert Financial Digest. As for a track record, many newsletters go out of business within a few years. Some will have success in the short term, maybe as a result of skilled, knowledgeable writers, but more likely, it’s just plain dumb luck.

One such prognosticator is the famous (or infamous, depending on your point of view) Joe Granville. I remember back in the 1980’s when his forecasts could literally move markets.

Here is a recent article from MarketWatch.com indicating that Granville had turned bullish, i.e. he expects stock prices to go up. Read more

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

The Cloudy Crystal Ball, Part 3

“You have to keep reminding yourself. We don’t know what’s going to happen with anything, ever.” – Peter Bernstein

Ignore this prediction!

Yesterday’s Wall Street Journal had a very pessimistic “Abreast of the Market” entitled There’s Always Next Year: Hopes Fade for Second-Half Stock Rally As Credit Crunch, Weak Earnings Persist.

For those of you without a newspaper or online subscription to the WSJ, here are some relevant quotes:

“Hopes have all but faded among investors that the stock market will be able to mount a much-anticipated second-half comeback.

Many now think a sustained rebound for stocks may not be in the cards until the middle of next year. Even then, their expectations are limited as the problems in the financial markets continue to spread rather than ease.”

“‘Earlier in the year, we had hoped that the economy would see an uptick in the second half,” and stocks could rally, said Robert Pavlik, chief investment officer at Oaktree Asset Management, which manages some $350 million. Now, he characterizes his outlook for the stock market through the rest of 2008 as “gloomy” and hopes for “some kind of modest recovery in 2009.”

“We just can’t make a case for a sudden bull market or a sudden economic surge,” said Neil Hokanson, a Solana Beach, Calif., financial adviser with client assets of $330 million.

“It’s hard to say what the next leadership could be for the market,” said Linda Duessel, a stock strategist at Federated Investors. With all the crosscurrents, “we’re talking about a sideways market” for the remainder of the year, she said.

Convinced? These “experts” believe that the stock market is going nowhere for at least the next six months. But let’s think about this analysis. What do these strategists know that isn’t already known? Probably not much. And can they predict the future any better than anyone else can predict the future? No, probably not.

So, why pay any attention to them? Good question. Here are words of wisdom from William Bernstein, author of The Four Pillars of Investing:

“It is said that there are only two kinds of investors: those who don’t know where the market is going, and those who don’t know that they don’t know. But there is a rather pathetic third kind – the market strategist. These highly visible brokerage house executives are articulate, highly paid, usually attractive, and invariably well-tailored. Their job is to convince the investing public that their firm can divine the market’s moves through a careful analysis of economic, political, and investment data. But at the end of the day, they only know two things: First, like everybody else, they don’t know where the market is headed tomorrow. And second, that their livelihood depends upon appearing to know.”

To be continued …

The Cloudy Crystal Ball, Part 2

“We have two classes of forecasters: those who don’t know — and those who don’t know they don’t know.” – John Kenneth Galbraith

Politics and the Stock Market

Forget about the issues, the upcoming presidential debates, or even voter turnout. Why even bother to vote, when the stock market can tell us who will win?

An article posted today on the CNBC website, ”Who’s the Next President? The Stock Market Says…” gives us an “analysis” of the upcoming presidential election. The article’s writer bases his analysis on the Stock Trader’s Almanac and Standard & Poor’s, publications that are more commonly used to make predictions and comment on stock market trends. It’s a very entertaining article, but has no informative value in helping you to become a more successful investor. The following quote is very revealing:

“Presidential election years are usually good for stocks, no matter which party wins, while the market’s performance in the three months prior to the November vote is a reliable indicator of which candidate wins.”

Well, so far 2008 has not exactly been a banner year for the stock market, so the first part of that quote has been shot full of holes. But consider this, suppose that you had taken this “prediction” to heart and invested 100% of your capital in stocks in January, instead of following your well thought out investment plan? Where would you be now?

The tail end of that quote tells us who the likely winner will be in the presidential election, depending on whether the stock market is up or down over the next couple of months. This is a very limited view of what economic factors may influence voter behavior — the rate of inflation, the unemployment rate, not to mention the popularity of the present administration, surely all play a part. Certainly using just one indicator – the stock market – is misleading at best.

The article also attempts to give some guidance on how well the stock market will perform, depending on who actually wins in November.

Try to make sense of any of the analysis, if you can, whether you are a short-term trader or a long-term investor. But, please, don’t take anything in this article too seriously. These type of forecasts work, unless they don’t. It is all just “noise.”

And, please, do vote.

The Cloudy Crystal Ball, Part 1

“If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen to the stock market.” – Benjamin Graham.

“Is this a good time to invest?” Inevitably, whenever I’ve met someone for the first time and she learns that I’m a financial advisor and investment manager that is one of the two questions I am asked. Sometimes, often depending on the state of the economy, that question may be raised even before the “how do you do” pleasantries. And if it’s not that particular question, it’s the other perennial favorite, “What do you think of the market?”

My answer to the first question is, “Yes. It’s always a good time to invest, but it depends.” By that, I mean that I have no way to predict whether the market will go up or down or even sideways in the short term. But, over the long term, I am utterly convinced that investors in the equity or stock market will be well rewarded.

By “it depends” I’m not being obscure or hedging my bets. The fact is, only your individual circumstances can determine whether a long-term investment in the stock market makes sense. Your portfolio makeup should be based on your individual goals, and your willingness, ability, and the degree to which you need to take risk. Entry into the equity market should not be dependent on a prediction of the short-term direction of equity prices.

Predicting Stock Prices

No one can accurately and consistently predict the short term direction of the stock, bond, oil or any other market, for that matter. But that doesn’t stop them from trying to, whether as a professional or merely as a hobbyist. The fact is, being an economist, mutual fund manager, market strategist or stock broker doesn’t confer clairvoyance.

Yet, within almost every issue of The Wall Street Journal, Barron’s, The New York Times or Money Magazine there is at least one article discussing recent stock market occurrences, both good and bad, and why that trend will or won’t continue. Frequently, so-called experts will be called upon for a quote, one from either side of an issue. One will say something like, “The dollar is definitely in a strong upward trend,” while the other remarks, “The dollar’s strength is expected to be short-lived.”

These contradictory opinions make perfect sense. In every transaction, there is always a buyer and a seller. Each market participant believes that his or her decision is the right one. The market sorts out these thousands and thousands of opinions and arrives at a price that reflects the best accumulated knowledge at that time. As facts and factors change, and as opinions change, then stock prices change.

The real question is, “Can anyone predict these changes on a regular basis?” My answer is, “No.”

To be continued…