Genius!

Monday I posted an essay titled Beware the Lucky Guesser, where I paraphrased a recent conversation between a young trader and a seasoned money manager. Well, the latter---who advised viewers to "buy high" because stocks are "going higher"---was on CNBC a few minutes ago, and guess what; since just the other day he decided to dig into the thirty stocks comprising the Dow Jones Industrial Average and, as a result, has determined that the Dow is likely to take a 15% dive over the next two months, then bounce back sometime in October to finish the year at an all-time high. Although he's only telling his clients to do a little profit taking---as opposed to sell everything now and buy back in 8 weeks.

He's a careful genius this one. If he's wrong and the market sells off and doesn't rebound by year-end, he was right about the selloff. He can simply say his analysis was perfect in terms of predicting a decline, it's just that the market's taking a bit longer to gather itself before ascending to new heights. Or, if he's wrong and stocks continue to rally from here, he was right about the reaching of record levels by year-end, it's just that the world agreed with his bullish call sooner than he expected and therefore didn't allow the big selloff to occur first. Beautiful!

In all my years in the investment business I have discovered only one guru who consistently got it right, Sir John Templeton. He made the following uncanny prediction:

"There will always be bull markets followed by bear markets followed by bull markets."

A few market-timing/forecasting thoughts...

A friend of mine just got back from an investment committee meeting where he listened to a mutual fund wholesaler forecast low interest rates well into 2016. I attended a presentation recently by a government pension portfolio manager who all but predicted, among other things, a 9% stock market gain for the second half of the year. I read a Seeking Alpha article yesterday that deftly dispelled any notion that the present bull market is anywhere near long in the tooth. Oh, and my investment committee friend also commented on how the fund wholesaler's company was ranked number one by Barron's for its 10 year results (as a fund family).

Pardon my skepticism, but:

As for low interest rates into 2016: They (the people who pay the young man to address investment committees)---believing it'll be good for stocks their assets under management---so want rates to stay low into 2016. So much so that they see low single-digit economic growth, troubles in emerging markets and a walking-dead bond market for many years (well, at least 3) to come. All the bias confirming data they glom onto notwithstanding, making a 3 year interest rate prediction is a very dangerous game to play with other people's money.

As for a 9% gain for the second half of this year: Bless his heart, the pension portfolio manager is so hopeful, and inexperienced---and wanting to please his audience---that he was willing to parrot what he heard that hedge fund guy say the day before on Bloomberg. God help him if that hedge fund guy is wrong!

As for the Seeking Alpha article: The author makes great points, but at the end of the day he's long stocks and needs to be right.

As for the best fund group over the past 10 years: For this one I'd ask the gentleman; "So were you the highest ranked 10 years ago?" (That would be a no btw.) "Oh, so who was the best?"  (He wouldn't know---but let's say he did.) "Oh, and where did they rank for the past 10?" (Not near number one [I'm speculating from experience] btw.) "Oh, so I guess we better stay away from you guys then." My point: 10 year mutual fund track records are almost worthless. There's absolutely no reason to believe that the number one strategy for 10 years (could've been 3 or 4 phenomenal years which produced the best average over 10) will remain such going forward. The odds of a mere human fund manager possessing the insight, and humility (after having been the best for 10 years), to know when the old strategy's luck has run out---and what to do to remain number one going forward---are, well, you tell me.

The Butterfly Effect... (video)

My business requires me to stay in tune with the financial market narrative du jour: If only to help our clients---through my written commentary as well as during face-to-face meetings---see through the media haze and maintain what I view to be a healthy long-term perspective. As personality after personality offer up their predictions (and, thus, their portfolios' positions) through the financial networks, I find myself asking the TV; "How the heck can you possibly know that? By what magic can you know at what level the S&P will close out the year? Aren't there way too many variables?" Of course, were I actually addressing those self-anointed gurus, my questions would be purely rhetorical: I absolutely know that they absolutely cannot know. For me to believe otherwise would be detrimental to the investors who rely on our services.

With that in mind, I have re-posted below an article I wrote exactly a year ago today titled The Butterfly Effect. If you at all listen to the prognosticators, I  suspect that you can't help but wonder if maybe, just maybe, the one who claims to have forecast that we'd be precisely where we currently be has it all figured out. If so, please read the following in its entirety. I found the video to be particularly interesting:

 

THE BUTTERFLY EFFECT, July 15, 2012

I have expressed here in numerous articles my belief, I should say “the empirical truth”, that the near-term directions of economies and markets are impossible to predict. There are infinite and ever-changing variables at play. Think of a feather drifting in the breeze; the slightest invisible current can alter its direction without warning. A butterfly in India can flap its wings and set off a chain of events that will one day destroy a neighborhood in Midwestern United States. Think of seven billion individual human beings, each pursuing his and her own separate interests, each setting off chain reactions affected by invisible currents too numerous to count and too ephemeral to follow.

Economists and gurus of all stripes will (virtually) never cop to their (of course it’s everybody’s) cluelessness. For economists, it’s forever the counterfactual. The champions of fiscal stimulus told us that without the $800+ billion spending package unemployment would go north of 8%. Well, with the package, the jobless rate went north of 10%, and remains north of 8% today. Of course, to them, this only proves that we needed the stimulus even more desperately than they originally forecast. They now claim, in arrogant I-told-you-so fashion, that without it, unemployment would've gone into the teens. Shame on us for ever doubting them.

But the market gurus take the cake. They’ll make 200 guesses over 10 years, get lucky on 81, then feature one or more of those 81 in every article and ad selling their newsletter subscription, newest book or, worse (and scariest) yet, their money management services. The sad thing is, a few of these guys and gals have some decent insights to offer.  But they forever kill it with me the moment they claim to have foretold (for example) back in the early 2000s just how the last ten years would play out—as yet another (my 81 out of 200 example—who has 1.5 million subscribers to his newsletter) tried recently. I have yet to Google even one of these prognosticators  (there are newsletters that record and track their every prediction) without finding him or her to be sorely misleading (by professing predictive prowess) his or her readers. Not that the claim in question isn't valid, it’s just that for every one lucky guess I’ll discover three others where he or she entirely missed the mark. I mean think about it; if they indeed could accurately forecast anything, why the hell would they forecast it for you and me? They’d be trillionaires. And they’d confine their predictions to their own trading accounts (for their strategies wouldn't work if everyone followed them), while on their yachts sipping Dom Perignon and/or curing world hunger.

So what are we, as investors, to do? In my too-humble-to-forecast opinion we default to the cyclical nature of all things, to fundamental fiscal values and to fundamental valuations. Cyclicality, in economic terms, would be the movement between expansion and contraction—intensified or muted in both directions by man’s (our elected and appointed officials’) efforts to control nature, and, at times, by Mother Nature herself (see video). In financial markets that would be your bull and bear markets—intensified in both directions by man’s greed (tech in the 90s, real estate in the mid 00s) and by his fear (tech in the early 00s, real estate in the late 00s). Fundamental fiscal values—the values of fiscally sound families, companies and countries—come into play when we’re talking public policy: Policymakers simply can’t borrow beyond their countries’ means, centrally plan their economies and subsidize the efforts of their cronies without ultimately exacting great suffering onto those who naively voted them into office (think today’s Europe). Fundamental valuations for stocks would be the price of shares relative to earnings, earnings growth, book value, free cash flow, dividends, liquidity and interest rates. For bonds it would be simply where yields sit (historically speaking) relative to maturities and credit quality.

Today’s snapshot:

The global economy recently suffered what’s been dubbed the “Greatest Recession Since the Great Depression”. Current pace notwithstanding, I don’t suspect man has yet entirely circumvented the economic cycle. Egregiously poor public policy is playing out in Europe (shame on us here in America if we can’t recognize where they went wrong and keep from making the same mistakes). Stocks have rebounded measurably from their 2009 lows, yet valuations remain relatively (historically speaking) compelling while bond prices are trading at valuations I never imagined (prices extremely high, yields extremely low).

All that said and you’re still desperate to know: When will stock prices trade where earnings (by historical norms) would put them?  And when’s the bond bubble going to burst?

Okay you win. Against my better judgment I’ll offer my forecast, but I’ll need a little time to formulate, then get back to you. And while I’m at it I’ll figure out precisely when the next hurricane will hit the Midwest, and how the world economy will fare as seven billion personalities allocate their diverse resources in the weeks and months to come.

Huge selling going on today!

Wow! Investors are dumping stocks today big time! "Say what?" you say, "the Dow's up 170 points! Looks like investors are buying stocks big time!" Well, yeah, but they gotta buy from somebody, right? Meaning, somebody has to sell them their stocks. And why would somebody sell their stocks? Well, because, for whatever reason(s), they believe it's time to sell. And who knows? Maybe they're right.

So why would I rain sprinkle on your parade? Why would I inject doubt reality amid such optimism? Because I want you living in the real world: Where short-term market fluctuations are impossible to predict and potentially disastrous to time. I want you never forgetting that investing is a long-term proposition that requires patience and discipline, and that short-term volatility can never be the inspiration for long-term investment decisions...

Read again Stress Less...