DIS and DAT - Our Prediction - July 2014
Our periodic communication that reminds you to ask, “Should I react to those headlines?”
"Stock picking is both an art and science, but too much of either is a dangerous thing.” Peter Lynch
It is getting hot outside and “the market” is even hotter! Predictions abound. A correction is coming. A huge crisis is coming. A blast off is coming. The new neutral is coming. UGH! What is one to do???
Peter’s quote above regarding the danger, has been ringing in our ears lately. For explanation purposes, let’s say that science describes the analytical work of discovering more about the behavior of investments and markets. Then also that the word art describes a person’s view of event(s) at that moment. If that view passes without being captured in art it is lost forever. So typically in this industry research relates to the science part. The communication of research, hunches, gut feelings then relate to the art part. Lynch explains further in his book Beating the Street about the dangers of too much focus on either art or science in his chapter titled “art, science, and leg work.”
Regarding an over reliance on art he wrote:
“Those who hold this viewpoint tend to prove its validity by neglecting to do research and “playing the market, which results in more losses, which reinforce the idea that they’re lacking in knack. One of their favorite excuses is that “ a stock is like a woman --- you can never figure one out.” This is unfair to women.
Regarding an over reliance on science he wrote:
“A misguided faith in measurement has proved harmful as far back as Thales, the early Greek philosopher who was so intent on counting stars that he kept falling into potholes in the road.”
Recently Aswath Damodaran, professor of finance at NYU, concluded his article by saying the best thing to do in reaction to bubblers is nothing! Here are a couple of interesting quotes from his June 16th 2014 article titled, “Bubble, Bubble, Toil and Trouble: The Costs and Benefits of Market Timing”
“It is no coincidence that every market correction in history has created its gurus (who called that correction right) and those gurus have almost always found a way to discredit themselves ahead of the next one.”
“The third is that being right is often the worst thing that can happen to bubblers, because it seems to feed into the conviction that they are always right and leads to increasingly bizarre predictions.”
With the thought that being right is often the worst thing that can happen, parts of wiki articles about past predictors and their predictions are interesting:
While working as a stock analyst at Shearson Lehman, she became known for predicting Black Monday, the stock market crash of 1987. As indicated in the Wall Street Journal article on October 28, 1987, “Ms. Garzarelli, a research analyst and money manager for Shearson Lehman Brothers, Inc., turned bearish on Sept. 9. By Oct. 12, when she appeared on Cable News Network’s “Money Line” program, she was fiercely bearish, predicting an imminent collapse in the stock market. She gave USA Today a similarly dire forecast the next day.”
"I felt awkward because I got so much attention. A few weeks after that I made a negative comment, and the market dropped 120 points that day. The Wall Street Journal wrote that I had moved the stock market, and I was very uncomfortable. My career was going very nicely until then, and it was too much attention. It was a lot of pressure." Elaine Garzerreli
Joseph Ensign Granville (August 20, 1923 – September 7, 2013), often called Joe Granville, was a financial writer and investment speaker. He popularized the use of "on balance volume", a technique of technical analysis that attempts to predict future prices ofstocks, commodities, and other financial assets traded on financial markets for which historical price and volume information is available.
Granville is probably best known for his bearish market calls during the 1970s, 1980s, and 1990s, when he claimed that the stock market was headed for imminent collapse. His overall track record, according to the Hulbert Financial Digest, is very poor.
The Granville Market Letter "is at the bottom of the Hulbert Financial Digest's rankings for performance over the past 25 years - having produced average losses of more than 20 percent per year on an annualized basis."
Granville was known as a great showman who would emerge from a coffin at an investment conference, or appear to walk across water (at a swimming pool) when meeting clients. According to Robert Shiller in his book Irrational Exuberance.
His investment seminars were bizarre extravaganzas, sometimes featuring a trained chimpanzee would could play Granville's theme song "The Bagholder's Blues," on piano. He once showed up at an investment seminar dressed as Moses, wearing a crown and carrying tablets. Granville made extravagant claims about his forecasting ability. He said he could predict earthquakes and once claimed to have predicted six of the past seven major world quakes. He was quoted by TIME Magazine as saying "I don't think that I will ever make a serious mistake in the stock market for the rest of my life," and he predicted that he would win the Nobel Prize in economics.
Abby Joseph Cohen
Successes and failures
She is famous for predicting the bull market of the 1990s early in the decade. However, she failed to predict the dramatic stock market decline of the early 2000s and developed a reputation as a so-called "perma-bull" and was ridiculed for her continuous bullish predictions after March 2000 as market indices fell. Her reputation was further damaged when she failed to foresee the great crash of 2008. On a CNBC appearance in March 2008, she predicted S&P 500 at 1550 by end 2008.
In an August 10, 2007 appearance on CNBC Abby Joseph Cohen predicted the S&P 500 would rally to 1,600 by December.
In December 2007 Abby Joseph Cohen predicted the S&P 500 index would reach 1,675 in 2008. The S&P 500 traded as low as 741.02 by November 2008, 55% below her prediction.
On March 8, 2008 Goldman Sachs announced that Abby Joseph Cohen was being replaced by David Kostin as the bank's chief forecaster.
On May 1, 2009 Abby Joseph Cohen predicted, "The Standard & Poor’s 500 Index may jump 20 percent to 1,050 over the next six to 12 months as investors buy stocks trading at low valuations."
On August 6, 2009 Abby Joseph Cohen declared, "the new bull market has begun," and proclaimed Goldman Sachs sees the benchmark Standard & Poor's 500 index .SPX in a range of 1,050-1,100 toward year-end. The S&P 500 index traded around 1,000 on August 6, 2009, after a 50% run-up from the year's low.
Hopefully the three bio’s show the point that continued “success” at predicting is unlikely. If the view is taken that “prediction” is the art portion of the equation we see that it's only a view of current analysis, and really has no bearing on the future. Therefore, D I S suggest that you do not risk your financial life on the artist view..... regardless of how beautiful the past paintings have been.
In a piece written for Forbes in February of 2014 Warren Buffett wrote this:
“Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)”
For purposes of explaining this topic more fully, a reference to last year’s DIS and Dat titled, “ The Elevator is Full” may help. In that issue a description of our conclusions from our analysis was given. An objective of the issue was to provide more clarity on a section of our investment philosophy. The concept covered the thought that over the long-term investors will transfer their money into areas where it is treated better. The move is not instantaneous or short term. A couple of paragraphs from that issue is copied here:
“Now we have no idea if this process continues or what pivot points might occur. The point is to explain that we believe this unwinding of low yields, combined with an unwinding of the disbelief in the earning power of corporations, could occur over a long period of time. The process could have several stages based on the decisions that individuals make in order to protect themselves the best way they know how. We find it odd that given a long period to think market participants would favor ten year U.S. treasuries at 2.48% yield or gold at $1,242 an ounce over the thirty Dow Jones index company stocks averaging 2.4 % in dividend yield and 7.6% in earnings yield.
Therefore we believe we may still have stages yet to survive. Similar to the beach situation as a frustrated mother at the beach screams “the elevator is full", some people still have to decide whether to wait it out, take the stairs, or stand patiently for the next elevator. Investors may continue to flee gold, and U.S. treasuries in search for the value of earnings in U.S. companies even with the Dow Jones around 15,000.”
As our disclosure says below these reports are not trading or investment advice. This is simply an explanation of our analysis and conclusions. We agree with Peter that much more “legwork” is necessary in order to improve generic investing results then just following a “hot predictor.”
Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Diversified Investment Strategies, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.
In our thinking communications are just a representation of analysis, the “Art” part if you will. DIS also began sending out the “Dis and Dat Markets Analysis” with more details of our analysis. We believe the changes that have occurred from that period is what is important now. The “rightness or wrongness” is not as important because the events are in the past either way it turned out, even though the media uses a lot of time on this type of “news”. One change from last year is that we now know Fed Chairwoman Yellen has decided to stop the bond purchases by October 2014, but more about that in our Dis and Dat Markets Analysis. If you would like the full edition of last year’s Dis and Dat it remains available on our website www.disria.com , or contact us and we will send it out to you.
So as for our prediction….. Our prediction is that predictions will continue. A few “gurus” will be glorified for their correct predictions after major turns occur, and many, many will continue to lose hard earned money following the predictions of predictors.
See you next time.
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