StockWatch
Let's Do the Time Warp Again
I spent a depressing day, recently, reading through what newsletter editors were saying at the beginning of September 2008, a little over one year ago.
That was just before Lehman Brothers went bankrupt, of course. The stock market was about to go over a cliff, entering a free fall that would not stop for another six months.
Just around the corner, in other words, was one of the most eventful and traumatic periods that any of us would ever experience. And, yet, precious few of the advisors appeared to be even dimly aware of such a possibility.
The discouraging lesson I draw from this experience harkens back to an investment classic written nearly three decades ago by then-newsletter editor, Harry Browne, who became the Libertarian Party's candidate for President in the 1990s. In his book, Why The Best-Laid Investment Plans Usually Go Wrong, Browne (now deceased) pleaded with readers not to bet all or nothing on any one advisor -- no matter how good his or her record -- or on any sure-fire market-timing system that allegedly "can't" go wrong:
"Almost nothing turns out as expected. Forecasts rarely come true, trading systems never produce the results advertised for them, investment advisers with records of phenomenal success fail to deliver when your money is on the line, and the best investment analysis is contradicted by reality. In short, the best-laid investment plans usually go wrong. Not sometimes, not occasionally -- but usually."
Was Browne being too harsh? You be the judge.
Let me start with those select advisors whose writings in early September 2008 look, in retrospect, to have been quite prescient. As you will see, however, even with them, it was difficult at the time to get too excited about many of their warnings.
Consider, for example, the newsletter that I suspect came closest a year ago to forecasting what was about to take place: The Elliott Wave Financial Forecast, published by Robert Prechter and edited by Steve Hochberg and Pete Kendall. In their September 2008 issue, received at the end of August, the editors wrote:
"The stock market is building up the necessary reserves for its next major move, a third wave decline at multiple degrees of trend. This should be the strongest decline of the bear market to date."
Bingo.
Unfortunately, this on-target forecast is somewhat tarnished by the fact that this was not the only time the newsletter had been bearish -- sometimes aggressively so. On the contrary, it had been almost uninterruptedly bearish for nearly two decades before that -- and, as a result, according to the Hulbert Financial Digest, was near the bottom of the rankings for market-timing performance over those two decades.
Another editor whose writings one year ago certainly appear clairvoyant is Richard Russell, editor of Dow Theory Letters. At the beginning of September 2008, when the Dow Jones Industrial Average was approximately 11,500, Russell wrote, "the Dow must remain above 10,961 on a closing basis. Breaking the Dow level set on July 15 would be catastrophic!"
That level was broken on September 15, and we all know what happened next.
Not bad.
But, before you give Russell too much credit for that call, consider this: Four months' before that, he was forecasting an "epic" bull market that would take the market averages to new all-time highs somewhere between then and 2010.
Oops.
Yet another editor who deserves at least some credit for prescience a year ago is Nate Pile, editor of Nate's Notes. During the first week of September 2008, when the Dow was around 11,200, Pile wrote:
"I still have not seen the sort of trading action that historically ends up marking the true bottom of a bear market…and, unfortunately, history suggests that if the market does start to hit new lows again, the next wave down will be at least as large as (if not larger than) the previous wave."
Paradoxically, however, Pile, during September and October of last year, kept his model portfolio close to fully invested, and only cut its equity exposure level back to around two-thirds in November and December. He, furthermore, kept his aggressive portfolio on margin during these months.
Pile's fate is reminiscent of the experience last year of the International Harry Schultz Letter. Schultz correctly forecasted that there would be a financial "tsunami" in 2008. And, yet, Schultz put into his model portfolio only a small minority of the recommendations he made in his newsletter, and the ones that he did place there suffered, on balance, a large decline during 2008. Because the Hulbert Financial Digest's rating for Schultz's letter (as is the case for Pile's and other newsletters) is based on his model portfolio, Schultz's rating failed to benefit from his otherwise correct forecast.
All in all, investors, therefore, might have been excused for not paying a lot of attention to at least some of these newsletters' dire warnings.
And, remember that these newsletters were among the select few whose warnings even came close to anticipating the carnage that was to come.
In contrast, the vast majority of the newsletters on the Hulbert Financial Digest's monitored list seemed, at least in retrospect, strangely complacent. Here's a sampling of what they were saying in early September of a year ago:
Jeffrey Hirsch, Almanac Investor: "I am ready to be a bull again! Not now, of course -- the exact time is still difficult to tell, and we will, in all likelihood, be early to the game, but three crucial elements necessary for a new bull market are getting our attention. The housing market is beginning to show serious signs of a bottom…quietly, the financial sector has been slowly healing."
Tom Bishop: BI Research: "The stock market and the economy continue to battle the same demons. They are not going away easily, though one would have to think the sub-prime mess is largely behind us…I think a 75 percent invested posture is about right at this juncture."
Bob Brinker, Bob Brinker's Marketimer: "We expect the S&P 500 index to challenge its previous record closing high of 1565 next year as investors move beyond the current economic malaise and look forward to improving corporate earnings prospects as the economy moves into its recovery phrase."
Stephen Leeb, The Complete Investor: "For the next few weeks, at least, the sun seems destined to shine on the stock market. Not only has Hurricane Gustav turned out to be far less devastating than Katrina, but the credit crisis seems to be reaching a conclusion. And, if that weren't enough, oil prices have shrugged off Russia's aggression in Georgia – or, perhaps they are just in a temporary state of shock and denial. Regardless, all these factors have lessened the downside risk in stock prices, for now."
Mark Skousen, Forecasts and Strategies: "We probably will be in a trading range until the November elections are over, and then we will see a Santa Claus Rally, especially if John McCain wins."
Donald Rowe, Wall Street Digest (which has since been renamed Carnegie Management Group): "With oil, gas and ag commodity prices coming down, consumers are eventually going to get some much-needed breathing room. This will also allow the economy to regain its footing and begin a recovery, especially once the 6-year cycle bottoms in September. The bear market in crude oil will help to improve consumer spending and should also bolster the stock market from here."
I could go on and on, but you get the point.
(And, to be clear, I selected these quotations to make that point; I'm sure I could have found other quotations from at least some of them that look at least somewhat more clairvoyant.)
The bottom line: Warren Buffett was right when he famously said that one of the primary purposes of stock market forecasters is to make fortune tellers look good.
This isn't to say that there are no good investment advisors, let me hasten to say. But, what makes them good is not their predictions but their strategies for dealing with an uncertain future.Mark can be contacted via email at mhulbert@marketwatch.com.
