In the ongoing debate about the market, investors often have a fixation about recent performance. What is the right question to ask? Asking "How are you doing this year?" or "How did you do last year?" seems intelligent, logical, and safe, but it is quite unhelpful.
The right questions -- those exploring the actual method and longer-term results -- are more difficult to frame and to ask.
The Current Debate
Doug Kass says we have hit the high for the year. Since he was accurate at the March low, many people will follow him without further thought. In fact, two-thirds of RealMoney readers agreed in their poll. Most of them, and most of the writers on that site, were already bearish. Many are geared to "sell the rips," so they have been out of step with the market for far too long. From this perspective, the big rally has gone too far.
Other observers think that we are only starting a new bull market -- 40% undervalued, by some accounts. From this perspective (closer to our own viewpoint) the starting point was far too low. Conditions have improved, and so should our earnings forecasts.
In future articles we hope to review the wide range of current forecasts and varying valuation methods. For now, let us focus on our results.
Predictions for 2009
In January we accepted a request from SeekingAlpha, where we contribute nearly all of our work, for an exclusive preview of 2009. With their permission, we re-ran the article on our site as well.
We made a number of predictions, with the pre-Lehman period as a crucial benchmark.
You can make a big return even without an economic boom. Stocks will start to react when it becomes clear that a depression is “off the table.” That gets us to the initial target of Dow 11,000. That is over 20% for the market, and even more in our basket of stocks. It may take a few months, but we can then reassess the economic prognosis.
We urge readers to review our reasoning, which still sounds pretty good.
We continue to view Dow 11,000 as a good initial target for the market. That is a benchmark for "no depression." Many stocks are still lagging.
We recognized that many investors were frightened, and encouraged them to invest in something--anything! We recommended corporate bonds for the most conservative. That was a big winner, especially for those who chose debt instruments from the financial sector. That was a double in a few months.
We recommended four specific stocks, something you do not usually see. We violated the old rule of forecasts: Never give a time frame and a price in the same prediction!
So what happened if you bought our four stocks on the first business day after we ran the article on our site? They were all winners by 20% or more, despite the early-year selling. The average gain is 56%. An investor who put 1/3 into a stock portfolio, as we suggested in the article, would be doing nicely on the year.
Obviously, that is not our long-term return. There have been three market crises in our management history. We were wrong last year, great in 2000, and OK in 1998. In the long run, we have beaten our S&P 500 benchmark very nicely for over ten years.
There are regulations on sharing performance information. The investor needs to ask. Start asking! Many of those featured as "calling the crash" did not make any money from their predictions.
We understand that few investors followed our January advice, mostly for psychological reasons. It is so hard when everything seems to be going wrong. Meanwhile, the wise and experienced advisors who followed this course last October (like Warren Buffett) were all losers.
The individual investor now has a new challenge. The market has rallied. Is it too late?
The most short-sighted investors think that last September was some defining moment that determined who was smart and who was dumb. This group, chasing performance, will be the biggest losers in the years ahead.
Full Disclosure: We still hold all of the mentioned stocks in individual and client accounts, although we have done a little selling in AAPL. We have new ideas and new themes, sharing some with those who asked for our free mid-year update.