The answers may surprise you, and will likely make you a better investor.
Let us never forget that it has never paid to bet against America long-term - defined as "many years." Yes, the best government that money can buy often screws up. But over any 5- to10-year or longer period we unwashed out here beyond the Beltway always manage to right the ship.
When discussing market forecasting, this history leads us to the issue of "stopped clocks." If you have a clock in your home that has stopped working, it will still be right twice a day, at precisely the time it stopped working and once again at the "same time" 12 hours later.
So when you listen to most of the gurus vying for your attention and your dollars, you must beware two things: (1) do you only like what they say because they are "experts" (that is, they wear a suit and tie and are on TV) who reinforce what you already believe, and (2) are they "stopped clocks?" Are they always bullish or bearish no matter what is going on in the world?
Now, then: since the market advances roughly 2/3 of the time and declines 1/3 of the time, it's easy to see why even buy-and-hold-forever forecasters look good over most time frames. As Peter Lynch wrote, "If you're good you can expect to be right seven times out of ten. But no one can be consistently right even 8 times out of 10." Since 7 out of 10 is rather close to the 2/3 of the time the market is going up anyway, it makes sense that it pays to be on the side of the bulls 'most' of the time.
Always-bullish forecasters may give you the positive reinforcement to stay long most of the time. If that's the case, there's little harm done. But be aware they can look like they are "right" about the market's direction without even engaging in a coin toss to see what their prediction will be that day. Since it goes up most of the time anyway, they are just along for the ride. (Albeit accompanied by some economic mumbo-jumbo to impress the masses!)
Always-bearish advisors and forecasters are playing to a completely different audience. People love a scary movie and these forecasters provide it for us. Since markets only decline about 1/3 of the time, it stands to reason that those declines can be vicious and scary, just like a horror movie. These advisors therefore tend to do exceedingly well - for themselves.
For investors, hold onto your wallet. Every newspaper editor knows scare headlines like "America Going Bankrupt!" get read more than "Budget Negotiations Begin This Week." Bearish forecasters depend on that to sell us their gloom and doom, week in and week out. Judging by their circulation, they are doing something right by scaring us. Judging by their performance numbers, those who listen to them will consistently lose money.
For statistical verification of this, I am indebted to the CXO Advisory Group LLC, which publishes this information on their website at cxoadvisory.com/gurus. They analyzed 6,549 forecasts from 68 "experts" from 2005 to 2012. Some of these gurus' fare no longer around, but there are some very familiar names among those still making forecasts.
As we might expect, the individuals who are perpetually or almost perpetually bullish have scored quite highly. Forbes columnist Ken Fisher, for example, is always looking for excellent long investments. According to the hard numbers provided by CXO, however, he just can't stay uninvested! He has often stayed too long at the bullish fair and, even after he is out, he often jumps back in too early.
Still, being a bull has paid off for him - with the market up an average of 66% of the time, Mr. Fisher's predictions have been accurate 65% of the time, or roughly equal to how a buy and hold investor would do by presuming the market will always come back.
At least Mr. Fisher and some of the other gurus who love to be long, like James Oberweis, Louis Navallier, the Cabots (of the Cabot Market Letter) Bob Brinker, and Ben Zacks (Zacks Investment Research) all managed to equal or surpass a coin-flipping-50%. Some other stay-long drum-beaters couldn't even manage to pass the coin-toss test.
Jim Cramer managed to be correct in his forecasts just under 47% of the time, Dennis Slothower about 45% of the time, and Abby Joseph Cohen, Senior Investment Strategist at Goldman Sachs, was near the bottom of all forecasters, making accurate predictions just 35% of the time. And yet, when she appears on CNBC, her remarks are parsed for pearls of wisdom!
It could be worse, of course. She could be a perennial bear, like Robert Prechter, editor of the Elliott Wave Theorist, who brings up the tail end of CXO's analysis: number 68 of 68. Mr. Prechter has never met a market he believes is not immediately headed for Armageddon. And his long-term track record reflects that bias: he has been correct in his forecast just 22% of the time. Every now and then he ventures out of his bear cave to grudgingly suggest it might be OK to buy for a short time.
So why does he have such a huge following and successful publishing business? Probably because many investors equate their gloomy view of the future of America with the certainty that the market, too, must go to hell in a handbasket, so they seek a counterpoint to any news that the market is rising from someone who assures them that the rise is doomed to reverse.
Others who fit this general description include well-known short-seller Bill Fleckenstein, president of hedge fund Fleckenstein Capital, with a 37% accuracy rating, Forbes columnist Gary Shilling at 38%, and John Mauldin, whose website states "Each week over 1 million readers turn to Mauldin for his penetrating views on Wall Street, global markets, and economic history." Those million-plus readers find ample agreement from Mr. Mauldin that they need immediate protection from the calamitous world around them. His accuracy rating is 40%.
Elsewhere on their site, the folks at CXO note there are many reasons why forecasters forecast. They may have "...Marketing ploys designed to capture fearful or greedy naive prospects, safe in the knowledge that quack detection is difficult when it hard to distinguish skill from luck. (One "big call" may anecdotally outweigh an otherwise extended record of mediocrity.)" Or… "Attention-getters for the media, designed to boost readership/viewership and thereby advertising revenue." Or as… "Attempts to manipulate others in support of existing or planned trades."
Whatever their reason, both extremes attract huge numbers of followers. But there are other commentators and forecasters who have no problem changing their viewpoint based upon changing conditions. For my money, those are the ones I and my staff choose to listen to most carefully. For instance, I enjoy Jack Schannep's analyses at TheDowTheory.com. (Accuracy rating 66.7%) And Forbes columnist and mutual fund guru David Dreman is always thought-provoking and never a stopped clock (64%.) I would say the same about Dan Sullivan of The Chartist (59%) and John Buckingham, CIO of Al Frank Asset Mgmt (59%.)
I also feel strongly about all those mentioned frequently in these pages and on our website, gurus who were not included in this study. I know that Sy Harding (Street Smart Report,) Bob Howard (Positive Patterns,) and Paul Merriman (investor spokesman and educator,) among others, understand the importance of market timing. Always-bullish forecasters do well, but those willing to adjust their portfolios in light of real-world events [shameless plug: "like us"] tend to do even better.
Where do we stand along this continuum? We try to stay in the "flexible" camp. Our long-term record reflects that. (All the more reason we have to always state the obvious: an exceptional record to date is no guarantee of future performance!) When the short-to-intermediate term future looks unattractive, we retreat to the safety of cash and cash-equivalents, low volatility equities and long/short mutual funds and ETFs.
When the short-to-intermediate term future looks attractive, we seek out those sectors and industries which are most popular, using the relative price momentum of more and more investors jumping on board to reinforce our positions. In the best of such times, we average up.
When the short-to-intermediate term future is too cloudy to get a handle on its direction, we keep a small cash cushion, buy or maintain positions in our long/short mutual funds and ETFs, and buy the shares of quality companies that are out of fashion (as evidenced by low PEs, low price/sales ratios, low price/book value and solid business fundamentals,) which we purchase either directly or via mutual funds, closed-end funds and ETFs. We also hold quality firms we believe are undervalued and write calls against some of them.
For what it's worth, we currently see the next couple to few months as likely to continue to be good ones, albeit not like 2013. But when the Fed tapers, then stops, printing money we may have a difficult period (also referred to, if you have raised some cash and kept tight trailing stops through the rough patch, as a "buying opportunity!")
Who are the best market timers for 2014 and beyond? If your answer is "the one who reinforces my preconceived notions," might I suggest you take up a less dangerous hobby than investing -- say, Formula 1 racing, undercover police work or mixed martial arts competitions. From our viewpoint, the answer is not forecasters who think like we do but, rather, forecasters who think for themselves and make us challenge our believs in the process.
And, as I wrote in my book Bringing Home the Gold, you are better served seeking forecasters and advisers with white hair, not white knuckles. The forecasters who've been around the block a few times, enjoyed successes and learned from failures are the ones you might want to give a listen to!
The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.
Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month.
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