Don't Listen To Peter Schiff Or Any Other Market Forecaster

Includes: JNJ, PG, XOM
by: Larry Smith

As a long time investor I have seen many market forecasters gain notoriety by making a correct call, the notoriety is magnified if the prediction goes against the popular thought of the time. Elaine Garzarelli, a Shearson Lehman analyst, on October 12, 1987 went on CNN's Money Line program and predicted the imminent collapse of the market, a prediction she also made to USA Today. On Monday October 19th, the market did collapse, dropping 22.6%. Ms. Garzarelli's call made her a Wall Street celebrity and she became a frequent guest on the various investing shows of the time, including Wall Street Week. After nailing the market crash call, her crystal ball became less clear and her prognostication accuracy declined. After a few missed calls, her fame diminished.

There have been other market forecasters who rose to fame; Abby Joseph Cohen was an early forecaster of the 1990's bull market, unfortunately, she remained bullish into the down market of the 2000's and lost credibility. Elliot Wave theorist Robert Prechter is another forecaster who received much acclaim after some seemingly right calls, only to lose much of his following after totally missing some other calls.

I mention these individuals because they are examples of intelligent individuals who use various models to predict the market, but like anyone who attempts to predict the direction of the market, they inevitably made mistakes, missed calls and lost their notoriety. No matter how advance the computer is, no matter how much information you have in your model, you cannot consistently predict the market.

This brings me to Peter Schiff, CEO and chief global strategist for Euro Pacific Capital. Mr. Schiff gained his notoriety in 2007 by correctly predicting a crash in real estate prices. Here is one of his quotes predicting economic turmoil in 2008. ""I think it's going to be pretty bad, and whether it starts in '07 or '08 I think is immaterial, and I also think it's going to last, not just for quarters but for years." Mr. Schiff also predicted a credit crunch and a rise in the price of gold, on both counts, he was generally right.

However, since that time, many of Mr. Schiff's calls have been wrong. In 2008 Mr. Schiff predicted gold would hit $2,000 by 2009 and $5,000 by 2013. Unless gold quadruples in price in the next three months, he will be wrong. In 2009 Mr. Schiff also stated "Oil prices had a pretty big run and might not make more headway by the end of the year. But we could see $150 to $200 next year. Oil never came close to $150.00 to $200.00 a barrel, in fact, in 2010 oil fell in price with an average price in the mid-$70's.

Think those predictions from 2009 were off, how about these from a July 2011, interview. Here are his thoughts on the dollar, "As soon as the world starts to focus on the dollar, we're going to be hitting new lows. By the fall I think the dollar will be hitting record lows against the Euro." On gold, Schiff had this to say, "Well I'm surprised gold is as cheap as it is given all of the money we've already printed and the money we're threatening to print. Over $10,000 GOLD could happen, there's no floor on the dollar, so there's no ceiling to gold".

I mention Peter Schiff because he was recently on CNBC making more predictions. One prediction was, in my opinion, so off-base I feel compelled to mention it. Mr. Schiff predicted the Federal Reserve will increase the quantitative easing program, not taper or end it. "They're going to have to do 100, 115, 125 (billion dollars a month). When the market comes to terms with that it's going to be a whole different ballgame," he said. "Right now, the Fed has to maintain the illusion that there's a method to their madness."

His reasoning for the increase in quantitative easing is that the economy is being propped up by the Federal Reserve's easy money policy. To keep the economy going the Fed will have to accelerate their buying, not decrease it.

I think he is right that the economy has benefited from the easy money policy of the Fed, but, this is nothing new. The Fed has moved rates up and down based on the health of the economy for decades. The recent zero interest policy and the bond buying is unprecedented, but the economic downturn, with exception of the Depression, was also unprecedented.

I do not think anyone can argue, the economy is in better shape today than it was 2009, 2010, 2011 or 2012. Home values are up, car sales are sizzling, unemployment is down, and industrial production has been steadily rising. Is the economy running full speed ahead? No. But, it is getting healthier and the Fed will soon begin to reduce its bond buying. In July, Fed Chairman Ben Bernanke stated that the Fed anticipates it will be appropriate to begin to moderate the pace of the $85 billion asset-purchase plan "later this year" and end them "around midyear" in 2014, if the economy evolves as forecast. The Federal Open Market Committee minutes from the July meeting showed broad support for a reduction in the bond purchases with a few members suggesting it should be sooner than later.

For seven years now Mr. Schiff has been proclaiming the American economy was on the verge of collapse, the dollar was going to have a massive decline, and that gold and other commodities were going to skyrocket. For most of those seven years he has been wrong. Gold has been down huge the last two years, the dollar has not lost value and the American economy is stronger, not weaker. Like others before him, Mr. Schiff keeps repeating the same talking points, in hopes that at some point he will be right.

No One is Smarter Than Mr. Market

I have been investing for almost 40-years and I have seen fear mongers come and go. In the early 1980's it was Howard Ruff, who saw coming hyperinflation. He advised people to invest in precious metals, collectible art and avoid stocks and bonds. He also proclaimed that people should start stock piling food. He was wrong. Mr. Schiff, to his credit, was right about the housing crisis, but like all other market forecasters, his accuracy declined as his notoriety rose. Let me be clear about one thing, no one can consistently predict the market.

Some of the smartest people around have tried to outsmart the market and have failed. Long Term Capital Partners was formed by some of the smartest people on Wall Street and included two Nobel winning economist. They had devised a computer trading program which, they claimed, reduced trading risk to zero while benefiting from certain arbitrage situations. Unfortunately they did not see a Russian financial crisis coming. Their trades went from bad to worse and they eventually had to be bailed out.

To believe you can predict the market is foolhardy and to think some self proclaimed market forecaster can predict the market is just as foolish.

Slow and Steady Does Win

If you want to succeed in investing, stop thinking someone has a crystal ball to the market, no one does. The better plan is to buy quality companies, preferably when they are cheap, and hold them. Reinvest the dividends and let time be your friend.

A quality business will, over time, grow and reward you. A quality business that pays a dividend you reinvest will, over time, reward you even more.

The recent market sell-off has dropped the price on some quality companies. Procter & Gamble (NYSE:PG) has dropped from over $80.00 down to around $75.00. Exxon Mobil (NYSE:XOM) has dropped from over $90.00 to approximately $85.00. Johnson & Johnson (NYSE:JNJ) was near $94.00 in August, it has now fallen to around $86.00. All of these companies have wonderful businesses, strong balance sheets, pay attractive and growing dividends, and all are the dominant company in their sector. These are just a few examples of the type of companies an individual investor can buy and profit from.

I believe your investment success is far more likely if you put your trust in quality companies, dividends and time, not in market forecasters.

Disclosure: I am long XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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