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.

New Index Returns Astound Wall Street

(from Dan Solin's Huffington Post blog, 12/7/2010 - click here for the original post)

It's hard to be modest about this achievement, but I am going to try.

In January, 2010, I created the Solin Random Stock Index (SRSI). For those skeptics who want to verify this claim, please see this blog I wrote at the time.

I wish I could report that my index was a complex algorithm, but it was really very simple. I just took the spelling of my last name, and punched each letter into a quote engine. I selected the first two stocks (listed on a U.S. stock exchange) that appeared for each letter. Here's the list of ten stocks that comprised the SRSI:

1. Sprint Nextel (S)
2. Sirius XM Radio (SIRI)
3. Realty Income (O)
4. Oracle (ORCL)
5. Loews (L)
6. Las Vegas Sands (LVS)
7. Intel (INTC)
8. International Business Machines (IBM)
9. Netsuite (N)
10. Nvidia (NVDA)

Now that we are coming to the end of the year, I thought this would be a good time to see how the stocks in my index have performed. I know my competitors are busy getting the performance data of their funds together so they can show how well they did. Morningstar will be analyzing this information in order to figure out which funds get the highest "star" ratings.
Investors rely on performance history. High performing funds can expect an influx of revenues. More revenues means more fees. It's a high stakes game. I want a piece of it.

So, how did the SRSI do from January, 2010 through November, 2010? Hold on to your hat. It's up an astounding 45.14%! No kidding.

The S&P 500 is only up 5.87%.

Let's put this stellar performance in perspective so you can really appreciate it. In an article published February 24, 2010, US News recommended its top mutual funds for 2010. It's methodology was impressive. It relied on "some of the brightest minds conducting investing analysis" and used ratings from Morningstar, Lipper, Zacks, TheStreet.com and Standard & Poor's.

Hard to see how you could miss if you followed these recommendations.

Let's compare some of these top funds with the SRSI. The performance data is as of October 31, 2010.

The Yackman Fund (YACKX) is up 9.07%. It was the top ranked Large Value Fund;
The FMI Large Cap Fund (FMIHX) is up 5.15% It was the top ranked Large Blend Fund;
The Parnassus Workplace fund (PARWX) was up 8.35%. It was the top ranked Large Growth Fund.

The SRSI clobbered the returns of all these top rated funds. I didn't have access to any of the "brightest minds" who do sophisticated analysis and I don't even have a subscription to any of these ratings services.

So what can I expect next? I assume invitations from the cable financial shows so that I can educate investors on how I did it. Maybe all those impressive ratings services will start to follow the SRSI. If I was set up to receive funds, I assume I would have to brace for a massive influx. I would wear "back office problems" as a badge of honor.

My real goal is to win Morningstar's Fund Manager of Year award. Bruce Berkowitz was the pick for U.S. stock-fund manager in 2009 for his stellar performance running Fairholme Fund (FAIRX). His fund has $10 billion in assets. Mr. Berkowitz is a highly regarded stock picker, holding only about 20 stocks. The SRSI holds 10 stocks, so we have the over-concentration thing in common.

Fairholme is only up 12.96%. Clearly, my stock picking skills are vastly superior. It should be no contest for 2010. I'm a shoo-in.

I'll still have time to write this blog. I really enjoy it. But I suspect that being known as a "stock picking guru" will have its perks as well.

Sorry, I have to run now. The phone is ringing. I'm hoping it's Jim Cramer. Maybe he will anoint me as "one of the great ones in this business", an accolade he is reported to have bestowed on

Lenny Dykstra, the ball player turned stock picker.

Dykstra filed for bankruptcy in July, 2009.

I'm no Lenny Dykstra.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

The Peril of Prognositcation

(From Dan Solin’s blog, Huffington Post, April 6, 2010)

Changing the way investors approach investing once seemed like a difficult task. This is no longer true.

The meltdown of the securities industry, and the 2008 market crash, caused even the most die hard advocates of investing as usual to question the current system. They should since it has nothing to support it beyond massive advertising and lobbying budgets. Unfortunately, for many investors, that is enough to keep them in the fold, often to their great detriment.

The current model is built on the demonstrably false premise that brokers and advisers have superior insights into the markets which permits them to manage our money intelligently. This "expertise" is touted in the endless predictions of "financial experts" who peer into their crystal ball and tell the unwashed masses what the future will bring. While Jim Cramer is the best known in this group, there are many others, including James Dines, Bob Brinker, Gary Shilling and Louis Navellier.

Now there is some objective accountability for these predictions. It is a welcome development and a valuable service to the investing public. A scorecard calculating the accuracy of market predictions can be found on the web site of CXO Advisory Group. The analysis covers more than two years, with over 4600 measurements for 51 gurus.

The overall accuracy of the group was a pathetic 48%. You could replicate this performance by flipping a coin.

Cramer had a score of 46%. He strongly objected to the methodology used to rate him. The exchange of e-mails between him and the CXO group is fascinating. You can read them here. Make your own decision about the merits of this debate. I do have to wonder how many investors relied on this comment, which he is quoted as making on October 1, 2007: "I'm now confident that what would have been a given in 2008, a brutal recession...will now be avoided and prosperity assured."

Relying on financial "experts" who purport to be able to predict the future is insidious. Not only are they as likely to be wrong as right, but listening to them distracts investors from demanding long term historical data which -- while also not predictive -- would give them an objective basis to make investment decisions.

Instead of asking advisers (who are only too willing to respond) "where do you think the market is headed", investors would be far better served by insisting on answers to these questions:

What is the long term (10-50 years) risk and return data for the portfolio you are recommending?

How do these risk and returns compare to a comparable portfolio of low cost stock and bond index funds?

If your broker or adviser is recommending individual stocks, ask her this zinger:

A recent study examined the stock picking skill of 2100 fund managers over a 32 year period and concluded that only 0.6% beat the relevant index (which the authors of the study attributed to luck). Are you in the 99.4% of stock pickers with no skill or the 0.6% of stock pickers who believe they have stock picking skill?

Then run for the door!

Dan Solin is the author of The Smartest Retirement Book You'll Ever Read.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

And Down the Stretch They Come

On a recent trip down the Historic Kentucky Bourbon Trail, I attended a brunch at Woodford Reserve Distillery in Versailles, Kentucky. The featured speaker at the event was Ellis Starr, one of the worlds’ premier horseracing handicappers. The distillery had brought Mr. Starr in to discuss the finer points of wagering at the track for the many attendees planning on spending the day at Keeneland.

Being a horseracing novice, I was intrigued by what Mr. Starr did for a living. In short, people interested in betting on horseracing will actually pay for Mr. Starr’s advice. Race tracks will also hire him to pick winners and losers for their in-house television networks that are broadcast to track patrons, off-track betting facilities and home satellite services.

As he talked about how to read a program and analyze each horse, the overall conditions of the track, the quality of the jockey and past performance of the horse, it dawned on me how similar these methods were to actively managing an investment portfolio. Was there really a method I could use to beat the odds at the track and expect better than average returns on a regular basis? There must be some hidden piece of data lurking in the race program that only I could see the right way.

Analyzing all the statistics surrounding various horses, much like investments, feels like the right thing to do. Unfortunately, the truth is whether at the track or on the trading floor, countless variables are at work that cannot possibly be interpreted with any regularity. Horses, like stocks, are going to behave however they choose to once they get out of the gate and are free to run.

My trip did not take me to Keeneland that day, but I did go back to review that day’s results as compared to the expert analysis. Much like the stock picking program offers that fill my inbox each day, a broker’s hot tip, or even my good friends on CNBC, I was left disappointed. In not one instance was the winner selected with any degree of certainty. There were a few picks that, if wagered properly, could’ve been winners, but knowing when and how to place that well timed wager would have been a gamble all its own.

What’s more, I got to hear this analysis for free. Most folks, just like in the investing examples mentioned above, pay for expert advice. This is not to disparage horse handicapping in any way, but rather to revisit that tried and true ideal that if something seems too good to be true, it probably is. No investment strategy, whether betting on the ponies or the stock market, is a guaranteed winner. It doesn’t make financial sense to bet on every horse, but, fortunately, you can bet on virtually every company in the world market and ensure that, over time, you’ll have more winners than losers.

As we come down the stretch of the investing year, now is a great time to evaluate how you choose to invest. Is it a thoughtful plan based on your appetite for risk and meeting your needs in retirement? Is it being carried out by professionals with no conflicts and only your best interests in mind? Or, are you simply spending day after day at the race track that is Wall Street, leaving your money in the hands of folks that continue to sell you products and advice based on a promised level of expertise that they simply do not have?

Wagering on a race here and there can be a lot of fun, but I wouldn’t bet my retirement on it.

By Chip Workman

cworkman@taaginc.com

The Secret to Investment Success

We all want to pick a winner. It doesn’t matter if we’re at the racetrack, casino, or investing our IRA. However, investors who spend most of their time trying to pick winners often end up losing more times than not. The number one determinant of your portfolio’s return is your asset allocation – the percentage of your investments in stocks and bonds – and not your superior stock picking ability or market timing. Once you have your asset allocation in place, your behavior will determine your long term success.

It’s easy to look back after a huge market run-up or downturn and think that it was obvious. It then becomes even easier to base our future decisions on recent events, by supporting our gut feeling by selectively looking at information that supports our opinion. We are constantly barraged with headlines that play to our emotions. The media loves to use current events to forecast the future. They want to create headlines that sell magazines or attract viewers, not create successful investors.

Steve Forbes said in a 2003 presentation to The Anderson School of Business, “You make more money selling advice than following it. It’s one of the things we count on in the magazine business – along with the short memory of our readers.”

And just how do investors do with all of the information available about how to pick the winners? Dalbar does an annual study of investor performance versus the indexes. Last year the average equity investor underperformed the S&P 500 by almost 4%. They were down 41.63% vs. a loss of 37.72% for the S&P. For the past 20 years (January, 1989- December, 2008) the average equity investor earned an annual return of 1.87% vs. the S&P 500 average annual return of 8.35%. On a $10,000 investment, this meant a difference of $35,240!

We cannot control the short term direction of the markets. However, if we focus on what we can control - our reaction to the market- our chance of success will be much greater. Author Nick Murray does a great job summing it up: “At the end of our investing lifetime, it won’t matter what your funds did, it’ll matter what you did. And what you did will be a pure function of the quality of advice you got – from one caring, competent (advisor), and not from any number of magazines.”

By Chris Carleton, CFP(r)