As I watch all the economic and market predictions for 2011 roll in from every media pundit and Wall Street strategist around, I can’t help but feel compelled to offer my own two cents on the topic so here it is: don’t listen to them!! I’m not saying they are all wrong, I’m just saying that there isn’t a single prediction any more prescient than the next. So read them all you want but do not make any investment decisions based off of them. To take action in your portfolio or anywhere else based on a hunch by someone with a soapbox is ridiculous, and I don’t care if it’s coming from Warren Buffett himself (and to my knowledge he does not engage in the prediction game, which is telling in itself). Only speculators engage in those games, not investors, so please don’t be a speculator.
Here is a case in point. I’ll pick on Richard Bernstein because both his 2010 predictions and his 2011 predictions are readily available. Richard Bernstein, by the way, was the Chief Investment Strategist at Merrill Lynch, so it was in his job description to publish a list of annual predictions, and he continues making them to this day. To his credit, he does call his predictions “guesses” and so that earns him points in my book, but I’d rather he didn’t publicly “guess” at all.
Looking over his predictions for 2010 he was only about 50/50, and that is if I give him credit for a few of his predictions that my dog could have gotten right. The first on his list, for example, was that “stock and bond market returns will again be positive.” Since the S&P 500 and Barclays Aggregate Bond indices have been positive in 79% and 94%, respectively, of their full calendar years since 1976 (that’s as far back as the Barclays/Lehman Aggregate data goes), it’s easy money to say they’re likely to go up in any subsequent year and so this probably shouldn’t even count as a prediction.
In another he predicted that “treasuries will probably underperform stocks.” This one, too, seems like a lock since 1) most assume that stocks usually trump treasuries and 2) every market guru has been predicting an imminent crash in treasuries for over a year now (see my previous post entitled “Beware geniuses”). But, giving him the benefit of the doubt that he was referring to long treasuries (they have the best chance of outperforming stocks in any given year) since he didn’t specify, the S&P 500 only beats a long treasury bond index a little more than 50% of the time on a calendar year basis (55.6% to be exact). Interestingly enough, Mr. Bernstein’s prediction only came true because of December’s extremely strong stock market performance coupled with a hammering in treasuries. Through November, long treasuries were ahead of S&P 500 stocks in 2010!
While he got a few of the easy ones right, he got some of the ones I feel are most important exactly wrong. He predicted a significant flattening of the yield curve as short term rates rise and long rates come down, and he got the fine print on how it would happen exactly backwards, too (he expected inflation to push up the long end in the first half and Fed tightening to bring sanity to the bond market in the second half). He predicted that employment in the US would improve, but we are still waiting for that to happen. He also predicted that the Dems would have a better showing in November than everyone thought they would, expanding the prediction to say, “investors will look back on the year and realize that monetary and fiscal policy stimulus still works.” Oops.
So, here are some predictions I think people should go forward with:
- US ingenuity, hard work, and capacity to perform when push comes to shove will help us overcome our current problems and keep our markets and our economy the envy of the world for some time to come.
- Europe’s desire to maintain the European Union and its common currency, as well as a fear of what might happen should it all unwind, will help it overcome its current problems.
- Developing countries will continue to gain strength and influence in the global economy, an evolution that developed countries should embrace, not fear, since it will likely lead to greater global stability, greater wealth, more investment opportunities, and higher standards of living for all.
- Speculators and investors alike will continue to be overly optimistic in good times and overly pessimistic in bad times. Investors who recognize the real battle is against their own emotions and the temptation to be influenced by the “noise” of the markets will be most likely to win that battle in the long-run.
- The financial industry will continue to do whatever it can get away with, morality be damned, since all they have learned from recent events is that society and the government lack both the understanding and the will to properly oversee and regulate them.
- The investment industry as a whole will continue to serve itself and fleece investors by marketing products, services, and strategies that do not benefit the investor, all the while overcharging for all of it.
You’ll notice that my predictions are very different from what you’ll find in the financial press. And it might not be obvious, but they offer actionable advice: 1) maintain exposure to equities since they give you a direct stake in global productivity; 2) keep your exposure global and free from an irrational home-country bias; 3) give your investments time to work and don’t trade your portfolio (other than to rebalance) because things are going up strongly or things are going down strongly; 4) ignore any short term noise in the market, no matter how loud; and 5) be skeptical and critical of every actor in the finance and investment industries and ask the tough questions before buying anything – you most likely don’t need it.
For my predictions at the end of next year I’ll simply post a link to this blog and say “ditto”.