Forecasts from the Best

In an industry that has no shortage of soothsayers and crystal ball holders more than willing to go on record as to what will happen in the market, why do we feel so strongly that this is such a waste of time?

The easy answer is that no one, not even those viewed as the best of the best, seem to be able to make good predictions over and over again.

Bill Gross, the renowned bond investor and Founder of PIMCO, has been in the headlines the last few weeks for missteps that have created significant losses in their funds. It seems that Gross, who was touted for some of his moves during the 2008 market downturn, was also loading up on Lehman Brothers debt over the same timeframe. Losses from this poorly timed investment have cost investors more than $3.4 billion.

His current bet is against U.S. Treasuries, for which he is under some scrutiny as they continue to rally. His explanation is that he’s not wrong, just not right yet. Not the comforting explanation you want to hear from someone you’ve paid handsomely to supposedly outguess the market. As the saying goes, even a stopped clock is right twice a day.

This reminded us of another guru we talked a lot about in 2009, Legg Mason’s Bill Miller. Miller was another manager held out to have these powers of intuition, only to have a few emotional reactions to the initial market downturn backfire on him spectacularly.

The point is not to drag out these experts and disparage them every time they’re wrong. These are smart people who are very good at what they do. It’s simply to suggest that the crystal ball is a fairytale, that no one has the ability to continually outguess the market time and time again.

The one expert whose investment prowess often gets held out above all others is Warren Buffet. In most cases, truth be told, we couldn’t agree more. However, what Mr. Buffet does is quite different from the average investor. In fact, it would be more correct to call Buffet a venture capitalist. His company, Berkshire Hathaway, often buys very large stakes or controlling interests in companies giving them significant say over day to day operations, management and other company functions. Even when they don’t have direct involvement, he is often able to set very attractive terms for his investments, such as his investment in GE in late 2008. The average investor obviously doesn’t have this kind of control over their holdings.

While thinking about Warren Buffet, consider his quote from a Berkshire shareholders’ meeting a few years ago. Buffet said, "Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees."

Ultimately, we believe that you need to work with someone that can help you put a plan in place and then stick to that plan, helping you make the sound decisions that you do have control over to help meet the financial aims surrounding your life’s goals.

In the end, the best investment forecast is to make no forecast at all.

Chip Workman, CFP®
cworkman@taaginc.com
http://www.taaginc.com/

The Danger of Stock Market Forecasts

(from Carl Richard's New York Times' Bucks blog, 1/10/2011 - click here for the original post)

Carl Richards is a certified financial planner in Park City, Utah. His sketches are archived here on the Bucks blog, and other drawings are available on his personal Web site, BehaviorGap.com.

January marks the time of year where gurus come out of the woodwork with their stock market forecasts.

I thought it would be valuable to review a few of them and try to understand what they might mean to real people investing in the real world. I’ll cover two recent forecasts and one from a few months ago, too.

Let’s begin with Robert Prechter. In July, 2010, he said that based on his version of something called the Elliott Wave principle, “the Dow, which now stands at 9,686.48, is likely to fall well below 1,000 over perhaps five or six years as a grand market cycle comes to an end.” Since then, the Dow has been up sharply.

Then we have Robert Shiller of Yale. He recently put his price target for the Standard &Poor’s 500-stock index at 1,430. (At this writing, the index is currently about 1,280.) Before you get too excited, note that Mr. Shiller says that his prediction is for 2020. That works out to less than a 1.5 percent increase a year for the next decade!

Finally, there’s Laszlo Birinyi. According to a recent Bloomberg Businessweek article, Mr. Birinyi believes the S.&P. can hit 2,854. And in an amazing display of precision, he predicts this will happen on Sept. 4, 2013.

So there we have it. Three market gurus with three wildly divergent forecasts that were all covered and reported by reputable, mainstream news outlets.

What’s a real investor to think or do?

The problem with gurus and their guesses is not that they’re always wrong. Part of what makes these forecasts so tempting is that the gurus are right just often enough for us to believe that there’s merit in listening. Unfortunately, it’s incredibly difficult to identify which forecast will be right.

So what does a real person do with this information? I suggest you use it as kindling, as a starting point. I know it’s fun to chat with friends or colleagues about your opinion of the stock market. I also know it can feel like the duty of any self-respecting American to have an opinion about the market and the economy.

Having an opinion is fine. But acting on it with real money is often incredibly damaging. To move beyond opinion you can start by doing the following:

• Realize that investing is a means to an end and not the end in and of itself. Take the time to define the end (your goals), and realize that good investment decisions are only made within the context of your life.
• Once you define your goals, figure out what it will take to get you there. Part of that will obviously include a rate of return that you need to achieve. If that rate of return is unrealistic, then make adjustments to your goals. For example, you can try to save more, you can spend less or you can delay goals like retirement.
• Once you have a realistic set of goals, build the most conservative investment strategy you can to get you there.

You need to realize that no one can tell you with any sense of precision where the stock market (or any market) is going. If you’ve learned nothing else during the last 10 years, I hope you remember that the stock market won’t perform in a set way indefinitely. At some point the market will go down, and it may be for a long period of time.

Just as likely, the market will often go up a lot over a long period. So for the real investors who are investing real money in the real world, take note that you should build your investment strategy around your life and your goals and not the annual guesses of gurus.