PermaBear Market Wisdom

When an extreme event comes around like 2008, those who called it are elevated in stature. I think its appropriate they are elevated, but not too much.

Many who called the crisis were incredibly vague prior to the problems (Shiller in his 2006 edition of Irrational Exuberance), and many enumerated tens of things that can wrong, and have always been saying so (eg, Noriel Roubini). Here is George Stigler describing the economist Leon Henderson circa 1942 in Memoirs of an Unregulated Economist):

Henderson had acquired a certain fame in Washington when he had been one of the few to predict the crash of 1937. An indulgent public had forgiven or forgotten his identical but mistaken predictions in previous years. I still label the repetition of a prediction until it comes to pass the 'Henderson method'.

Actually, a good doomsayer should predict a massive cataclysm is 'possible, if not probable'. In casual audiences this will work, because it is impossible to tie down, but it emphasizes the bad, so when that event happens, you simply say, 'exactly!'. A more quantitative audience will require actual numbers, so predict a cataclysm in 2-3 years, but here is the secret: always keep the improbable event forecast as being out 2-3 years. Most people who see you again, in a year or so, don't catch the inconsistency, because no one keeps archival real-time databases on prognosticators. As they say, forecast early and forecast often.

As a fund manager this shows up in your historical cumulative return data, which is why someone like Warren Buffet is so impressive. But if you simply disband your fund and start over, eventually, you can generate a nice arithmetic return, because a one-year -97% return can be offset by a 150% return, even if that won't really help the investors you had when you lost -97%.

Comments

[morph366:]

It might be worth having a look at the performance figures from Andrew Lahde and John Paulson among others - they may not have been shopping books, polishing their academic credentials, getting on TV a lot and hawking their advisory services but they did get it right in the way that counts - they cleaned up.

Jan 28 03:09 AM

[CAPT GW:]

Math is so funny! Yes, the $1MM investment that drops 97% will be only worth $30K before it "rebounds" 150% to a whopping $75K.

With most investors down 30% to 50% so far, that means that the average $1MM portfolio is now worth $500K to $700K by now. It will take a 100% return for a 50% loser to recover; and a 42% return for a 30% loser to recover.

Jan 28 12:12 PM

[CJJ:]

Truer comments haven't been said lately. Odd how these dooms dayers were laughed at years ago now are looked at as sages because their "predictions" are coming true. As the author says, most of the people were kind of right or more right than others, however many of them did not turn this into any sort of profit.
The bigger story here is that you didn't have to foresee these things happening to make money lasy year, instead you would have had to have a bit of luck, good at predicting what the government would do on a daily basis, been good picking up and down days for day trading and able to abandon all strategy of the past much faster than most.

Jan 28 02:08 PM

[CJJ:]

As for my prediction...I can only say things will either get better or worse...And either way people will underestimate the degree...And all of that will occur in 2-3 years...Or longer...

Jan 28 02:09 PM

[PROXIMO:]

Agreed. Throw enough S*#T against the wall and some of it is bound to stick.

Jan 28 04:23 PM

[dcb:]

This is an unfair comment. a house of cards can be unstable, but still built very high. then you add the irrational nature of human behavior on top of that and things get brought to extremes. don't forget that the market always goes up until slapped in the face with reality. Therefore, you can't predict when the illogical behavior will end, only know that it will. My investing strategy is to wait until the blow of of the dot.com bubble and make money on the way down, same with oil, and same with emerging markets. I only buy stocks in recessions, and started my long portfolio this past week. Keep my dividends, and sold everything and shorted at the end of may (memorial day weekend). Use history as a guide (Japan), ans when the palace in tokyo is worth more than california something is wrong, and when a cold water flat in moscow costs more than a nice luxury apartment in manhattan something is wrong. when you need a certified check to buy condo on the fist day it shows in the first hour, something is wrong. I didn't know when it was going to blow, but it was easy as cake for anyone to see. If you didn't see it it was because you didn't want too!!!

Jan 28 07:25 PM