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/

An Oracle Missteps

While as a rule I prefer not to forecast, an undeniable attempt by the markets at a recovery has begun, with some asset classes enjoying historic gains since early March. Even with this news, Warren Buffett, the Oracle of Omaha, has appeared in the media quite a bit with some downright depressing comments about the future of the economy. While I certainly believe that a return to “normal” will include some potentially significant bumps along the way and that a quick and easy ride back to where we were in 2007 (which was not, by any measure, normal either) is not likely, I am equally pessimistic about the uncharacteristically morose view that the world’s second wealthiest man has taken of late.

I have spoken with many people over the last few weeks that share this negative outlook, often quoting Mr. Buffett as a source for their worries and concern. While a fan of his overall career and his disciplined handling of his personal finances, I would like to offer an opinion that may not be so popular with the Warren-nation. Is it possible the Oracle has misstepped of late and is struggling to acknowledge the error of his ways?

Warren Buffett is a human being. That’s right, I said it. He plays bridge, he drives a Caddy, he has lived in the same house for 51 years. He also happens to be one of the most successful, disciplined investors of all time. Yet even with all his discipline and all the information a man of his status has at his fingertips, he has proven just as likely to succumb to the “what goes up, must move higher” mentality as any of us.

Buffett’s primary reasoning behind his most recent comments is that he is not seeing recovery on the floors of the companies in his portfolio. Is that because the economic recovery is a pump fake and we should prepare to run and hide? Or could it be Berkshire Hathaway is not nearly as diversified as one might think?

Over the last several years, look at the companies Berkshire has acquired. Acme Brick, Borsheim’s Fine Jewelry, Clayton Homes, Helzberg Diamonds, MidAmerican Energy, RC Willey Home Furnishings, NetJets. These are home builders, mortgage companies, furniture stores, fine jewelry dealers, energy companies, even private jet charter services. Berkshire got caught up in the boom in housing, luxury goods, energy and credit just like the rest of the world.

Once things turned sour, he made a multi-billion dollar bet on General Electric before it subsequently tanked even further. This is certainly not just an attempt to point out fault (I actually think with the terms he secured, this will be a good deal for Buffett in the long run), but rather an attempt to point out that no one person, not even the Oracle, has all the answers. The ability to be right time and time again is a noble endeavor, but a sucker’s bet. Greed and a sense that some companies just simply never underperform are powerful emotional pulls for even the shrewdest investor.

As the U.S. and global economies get back on their feet, and they will, even if it’s a slow, volatile comeback over several years, we must remember to not take the wins too seriously or the losses too much to heart. In the long run, smart, disciplined investors with well diversified portfolios will be rewarded, while speculators and gamblers will win some, but lose most.

By Chip Workman