Impossible To See The Future Is
Does anyone remember a professional boxer named Cassius Clay? He later became famous as Muhamad Ali but back in February of 1964 he was scheduled to fight Sonny Liston, then heavyweight champion of the world. Because newspaper writers are paid to produce articles, the bout was well previewed with fifty-nine of sixty-two sports columnists picking Liston to win. Those with very long memories may remember that Clay was victorious although I’ve been unable to locate any after-the fact retractions.
How does this tidbit from sports history relate to the world of financial planning and investments? Well, it’s the apparent need for predictions that concerns me. Do writers make them simply because they have space to fill or do they truly have insights to share?
You might think predicting stock market actions would be pretty easy since, like a boxing match, there are basically just two possible outcomes: win or lose, up or down. Of course, things can be a bit more complicated in practice as those sportswriters learned.
I suspect it’s the rare sportswriter who has an advanced degree in business but how might a PhD in economics from the University of Zurich do in predicting market actions? Marc Faber is described on his website as an “international investor known for his uncanny predictions of the stock market and futures markets around the world”. Early in 2013, he predicted a 1987-like market meltdown of as much as twenty percent sometime during the year. The market actually finished up over 32%. Late in the year, he predicted a market decline for 2014 and recommended investing in gold instead of stocks. At the end of the year, the S&P 500 was up over eleven percent and gold was down about two percent.
Moving to a market forecaster who proved to be completely correct at least once, allow me to introduce Martin Zweig, holder of a PhD in finance from Michigan State. During an interview on Wall Street Week on Friday, October 16, 1987, he stated “the bull market is dead”. Eerily, the next Monday, the S&P 500 fell over 29% in very hectic trading meaning that Zweig was exactly right. You might expect that someone who could ‘call’ a market crash with such amazing accuracy had been able to make a lot of money for his clients. Let’s take a look at the record. Zweig was managing a growth-oriented stock mutual fund from October of 1986 through the end of January 2013. Over that period, his investors earned nearly 6% yearly, comfortably close to the seven percent that is sometimes considered the stock market’s ‘normal’ return. But during the same period, the market itself earned nearly 10% (also annualized) and a conservative 30% stock/70% bond portfolio would have earned nearly 8% annually.
I don’t mean to pick on either of these gentlemen but each held himself out as an expert so looking into their results doesn’t seem unreasonable to me. At WWA, we are not market timing experts. Instead, we specialize in getting to know our clients so we can help them achieve their long-term goals. As for markets, we do make periodic adjustments to portfolios but always with humility. We have absolutely no illusions about being able to accurately predict market movements.
Why is that? Well, let me close with thanks to the Star Wars movies and Jedi Master Yoda, the pint size teacher who helps Luke Skywalker learn about the power of the Force. One of Yoda’s defining characteristics is his unusual speech pattern, including the quote that I’ve borrowed for today’s title. Before you take any pundit’s market prediction too seriously, you might want to reflect on Yoda’s understanding of the future.