Beware of market gurus who predict the future
Anniversary is a good reminder that some gurus are full of it
Beware of market gurus confidently predicting the future.
That’s important advice at any time, of course. But it’s especially worth remembering now, as we “celebrate” the ninth anniversary of Lehman Brothers’ bankruptcy and the subsequent collapse of our country’s financial system. One of the most important lessons we can learn is that no one — not even the experts — saw it coming.
And that’s sobering since those events in September and October 2008 were easily the most momentous financial developments in several generations. If the gurus couldn’t foresee them, why should we take them seriously at any other time?
Consider what one well-known guru told subscribers to his newsletter on Sept. 4, 2008 — just 11 days prior to Lehman Brothers’ bankruptcy. (To keep my lawyers happy, I won’t mention his name, but by no means was he a slouch. Subscribers paid $299 per year to get his newsletter.) “I am ready to be a bull again!” he trumpeted to his subscribers. “The housing market is beginning to show serious signs of a bottom,” he added. “Quietly, the financial sector has been slowly healing.”
This particular guru was not alone. Just two days prior, the editor of another leading newsletter wrote to clients that “for the next few weeks at least, the sun seems destined to shine on the stock market.” Among the reasons he gave for his optimism: “The credit crisis seems to be reaching a conclusion.” A week prior still, the editor of yet another newsletter told his clients that “the subprime mess is largely behind us.” I could go on and on, of course. But what’s important to remember is that, far from being at a bottom, the housing market at the time of these predictions was teetering on the edge of a cliff. The worst of the subprime mess lay directly ahead rather than in the past. The financial system was about to collapse. The Dow Jones industrial average dropped 25% in just four weeks’ time after the Lehman bankruptcy. If an equiv-
The mistake we make is to think we should make changes to our portfolios because of predictions that are intended primarily to be provocative.
alent drop were to occur today, the Dow would be more than
5,000 points lower by mid- October.
These gurus could hardly have been more wrong, in other words.
To be sure, not all of them in September 2008 were spectacularly off base. The late Richard Russell, then editor of the famous Dow Theory Letters advisory newsletter, told clients at the beginning of that month that it would be “catastrophic” if the Dow were to break below the
10,961 level. That level was triggered just two weeks later, and subscribers who heeded Russell’s advice sidestepped a 40% decline over the subsequent six months.
Before you give Russell too much credit for this call, however, you should know about another prediction he made in April 2008. That’s when he predicted an “epic” bull market that would take the stock market averages to new highs in the subsequent two years. As we know now, of course, it was an “epic” bear market that lay directly ahead. All-time highs in the Dow would have to wait another five years.
Am I being unfair? Perhaps a little. Daniel Kahneman, the Princeton psychologist who in 2002 won the Nobel Prize in economics, has pointed out that “most successful pundits are selected for being opinionated, because (their predictions are) interesting.” To illustrate his point, consider choosing between a guru who tried to predict where the stock market was headed and another who played it safe by constantly predicting that the sun would rise the next day. We’d always choose the former, even though far fewer of his predictions would come true.
The mistake we make is to think we should make changes to our portfolios because of predictions that are intended primarily to be provocative. If we can learn not to make that mistake going forward, perhaps the nine-yearsago financial crisis won’t have been completely in vain.
Mark Hulbert, founder of the Hulbert Financial Digest, has been tracking investment advisers’ performances for four decades. For more information, email him at mark@hulbertratings.com or go to www.hulbertratings.com.