Free Market Advice: Worth About What You Pay For It?September 21, 2012 @ 11:06 AM EST
I have made plenty of trading mistakes, big and small, but have perhaps finally learned two important lessons: A) Risk management is probably the most important skill a trader can learn and B) it is a fool’s game to try and “predict” the market with any degree of certitude. It is a game of percentages and money management, with nothing being wrong with an opinion or two as long as you don’t fall in love with them.
So, I never cease to be amazed by the abundant and adamant “free advice” one can find from “experts” in the media, top Street analysts, panelists on those shows we all love to watch, and the go to “quote” sources from investment firms large and small.
This is not a new topic here but we like to periodically revisit some of the expert calls. And some of those over the past two months or so have been doozies.
So here we go with a few of the recent misfires:
“Rough Path Ahead? September is Dow’s Worst Month” --CNBC, 8/31/12
“No matter how you slice it, the stock market’s odds in September are very poor.” --Mark Hulbert, MarketWatch, 9/4/12
“Apple historically loses 3-4% within the week after a new iPhone product announcement.” –chart analysis from Reuters/Morgan Stanley making the rounds before the 9/12 Apple iPhone5 launch with a constant theme of “Buy the rumor/Sell the news". (However, the same analysis shows AAPL has been up an average of +12.5% in the six months following the last four iPhone launches and +29.9% in the following 12 months)
“The cult of equities is dead and historic average annual returns of the market will not be seen for a very long time.” --Bill Gross, co-head of PIMCO, in a very highly-publicized analytical piece (August Investment Outlook) playing up PIMCO’s “New Normal” theme. (in fairness to Gross, he was talking big themes, not a current market call. However, Gross did have a darn good market call in the days right before the recent FED announcement, one of the few to be almost “guaranteeing” QE3 and recommending getting long things like commodities and inflation plays.)
“Investors who took advantage of the recent rally in risk markets should reduce their exposure in favor of safer assets amid domestic economic weakness and global political stresses”. –PIMCO’s other co-head, Mohamed El-Erian, in early August.
“I maintain my 1250 forecast for the S&P for 2012.” --Goldman Sachs chief equity strategist David Kostin throughout this year, although he has kept a lower profile recently, perhaps for good reason. Goldman has been all over the map: a) CEO Lloyd Blankfein has made many publicly optimistic statements on the market b) gadfly Abby Joseph Cohen seems to be perpetually bullish c) Kostin has been ultra-bearish d) Jim O'Neill, the chairman of Goldman Sachs Asset Management to our mind seems the most thoughtful, laying out both bullish and bearish cases for China and Europe but coming down on the more optimistic side e) there was a widely read note by a GS analyst which called for the S&P to test to 1375 or below following the FED announcement, or at least the recommendation to protect against such a market move and f) GS in a call today on Schwab stock said “don’t fight the FED”, which we read as bullish although they downgraded SCHW, citing lowered interest rate related earnings. (We always have to wonder what Goldman is really telling clients, and if that depends on “what tier” the client is placed in: “Muppet” or “Mainstay”.
“Anybody buying the S&P over 1416 or selling it under 1395 is an amateur.” --HedgEye’s twitter-happy Keith McCullough as the S&P traded in a tight range for an extended period in August and early September. Mr. McCullough has been fairly vocal about negative thoughts on the FED announcement and seems to have been more bearishly positioned than bullish, but it is hard to say where his firm is from day to day.
“There is no way the ECB can definitively do anything until after the German court ruling.” --paraphrasing CNBC host Simon Hobbs in a pretty vocal “rant” preceding the ECB announcement, which in fact was made before the German court ruling.
“The Dow Industrials have a serious divergence with the Dow Transports.” --many analysts in late August and early September and indeed some still saying it now in support of bearish calls
“The S&P will see a 20-25% decline this year.” --Nomura analyst Bob Janjuah, as recently as late August. Janjuah has been relentlessly bearish but we last saw a piece saying that if 1450 holds here this week he will give it up, “my stop loss will be triggered on this Friday's close if the S&P is still above 1450”. However, this seems like a very unwilling stop-out as he is also saying, “Central Banks Are Attempting The Grossest Misallocation And Mispricing Of Capital In The History Of Mankind".
Ok, that is likely more than enough as you get the picture. And this is not to say any of these calls will “be wrong” over the long-term. We also need to acknowledge that many in the media and analysts have been fairly consistently bullish once some action seemed to be shaping up this summer in Europe.
And it should also be noted that contrarian calls can work out spectacularly if one has deep enough pockets, a firmly held conviction, and the ability to withstand pain. The well-known Doug Kass of Seabreeze Partners tells the story of his short of AOL at a price of around $60, which went 30-40% against him before paying off big-time.
By the way, Kass is out again with a generally bearish call on the market, although it is hard to tell with Kass how long that is in play. Kass is dismissive of the recent “chase for performance” argument and thinks “ludicrous speed QE will become a net drag on the economy”. He said this week on CNBC, “I think that the investment environment is growing more dangerous. The world’s economies and the profit outlook are weakening.”
So, to wrap it up here, we will mix a couple of metaphors and say: “Free Advice is also like picking wild mushrooms: either deliciously rewarding or relentlessly fatal.”
(Author’s note: We have heard of this thing called the Daily Decision which follows a disciplined model approach and seems to do pretty well; that might be a sound alternative to “following the bouncing experts”. Insert happy face)
Be sure to follow David on His New Forbes Blog.