Look Out for Overly Rosy Outlooks

This weekend's WSJ had an interesting story on a "gullibility expert" who lost a significant % of his life savings to the Bernie Madoff fraud, thus suggesting that the so called experts can just as easily be seduced by the allure of quick money even when there is reason to be suspicious.

I suppose it goes back to something I touched upon Sunday, the tendency for people to mold reality to fit preconceived notions / conclusions instead of looking at things objectively.

If you want more examples of how intelligent and seemingly savvy people can fall for scams, you should check out CNBC's "American Greed" a television program that chronicles the misdeeds of various fraudsters, financial scam artists and the like. In every case people are offered something that they should know is too good to be true, but they fall for it anyway because of the guise in which it's offered. The show isn't particularly interesting for the scams themselves, but for the reasons that people fell for them.

Speaking of objectivity, in a post from last January I discussed (or quite frankly loudly derided) a WSJ op-ed that proclaimed that the economy was better in January of '08 than it was in January of '07, and 2008 was going to be a great year. To be sure, I'm not posting this to get in an "I told you so" but to sort of share a warning on overly rosy outlooks, namely:

At the end of the day there will always be risks, negative trends, etc, that will impact the markets, the economy, your businesses, investments, etc, and in order to combat those things you have to first recognize them for what they are. Therefore it probably makes more sense to listen to those who recognize those negative things and providing mitigations (or counterbalancing positive trends) for them, as opposed to those who completely ignore them, dismiss them, spin them as positive, etc.

Think: the difference between those who said that the mortgage meltdown didn’t really exist, was overblown, a non-problem, etc, vs. those who accepted the problem and the impact it could cause and then provided ideas on how to contain it / mitigate the impact .

Yesterday's WSJ had a story discussing the latest car industry sales numbers and as you can imagine they were positively abysmal. At this point it's not so much a question of by what % sales will drop, but a question of the quality of the remaining sales, and which automakers are going to be agile enough to adjust to a changing market. It's going to be interesting to see which automakers focus on making profitable sales (quality of sales) vs. the companies that get desperate and start trying to make sales at any cost.

Needless to say that Hyundai (HYMLF.PK)with their new sales promotion of covering $7,500 of negative equity on a trade-in has chosen the route of sales at any cost; it doesn't take a MBA to figure out that Hyundai has just signed up to sell cars for a loss since it's probably rare occurrence (if it happens at all) for them to earn more than $7,500 per sale.

Finally when I look at the % decline in Chrysler's sales it leads me to believe that some of the company's brands are more likely to survive than the company itself.

Disclosure: At the time of publishing the author didn't own a position in any of the companies mentioned in this article.

Comments

[axelrod608:]

Good points. The idea that "stocks are cheap now" simply because they sell for much less than last year is based solely on one criteria. I am much more impressed with predictions that take ino account the many economic factors outside the market as well.

In a deteriorating economy some - perhaps many - of those stock prices will go to zero. Others will keep falling. This is a stock picker's market. Buying a half-price stock because it's half price is no wiser than buying a half-price Rolex.

Jan 06 10:21 AM