“Market forecasters will fill your ear but will never fill your wallet.”
—Warren Buffett
About eight years ago, I was having lunch with a friend of mine. “Are you invested in the stock market?” he asked. “The market is going to drop big time.”
“Yes, I am in the market,” I replied.
“Well, you need to get out!” he retorted. “My guy says a big market crash is coming soon.”
It was obvious that he totally believed the advice of “his guy,” who I assume was some sort of financial advisor.
I found his statement very disturbing, so I told him, “It’s not really about what the market is going to do tomorrow or in the next few months. The important thing is, do you like your overall investment portfolio mix? You either like your asset allocation mix or it needs work, and you should change it.” As I began to explain just a little more, I saw him look past me into the great void. I could tell by his eyes that he had totally lost interest in my reply, so I simply changed the subject. Of course, “his guy” ended up being horribly wrong, as so many of “financial advisors” frequently are. The market had a huge run up shortly after this conversation. My friend lost out on all the gains he would have made had he simply left his investment portfolio alone.
I bring this up now because I have heard several of my friends say something similar during the last several weeks. I have also heard a half-dozen pundits on TV making similar predictions like, “a market downturn is imminent” and, “[this is the] last gasp of the bull market” early in the week. By Friday of the same week, the financial markets set new record highs. The only thing I know for sure is that the financial markets will eventually go down, and they will certainly go up afterward.
Investment gurus, managers of large fund companies, and TV pundits have no idea where the market is likely to go in the short term and have historically been wrong. Science and the financial markets have proven it time and time again.
• In the early 1900s, Louis Bachelier wrote his doctoral thesis, “The Theory of Speculation” in which he said successful speculation on the direction of stocks (in the short term) was not possible.
• Eugene Fama created the Efficient Market Hypothesis in 1970, winning the Nobel Prize in 2013 for his theory. All the publicly known information about a stock is correctly reflected in the company’s current stock price. A profit cannot be obtained by evaluating new information to look for either an undervalued or overvalued stock (above the overall market’s gain or loss). Also, the short-term direction of the stock market cannot be predicted.
• A 2009 Harvard Review article said that the future is far too complex to accurately predict the financial market’s short-term direction. There are just too many variables to be considered. All the latest attempts, including machine learning, quantitative models, historical models, and even psychic models have failed to accurately predict market direction in the short term.
• The Journal of Behavioral and Experimental Finance (volume 10, June 2016) points out most academic studies report that successful market timing requires an accuracy that has not yet been seen.
• American Enterprise Institute (aei.org) points out that 95% of financial advisors have done worse than the market indexes over time.
• In an interview on July 23, 2021, Surevest Private Wealth’s CEO Rob Luna said Wall Street analyst professionals have a horrible reputation for being wrong. Their reputation was further damaged recently when investment firms were successfully sued for recommending stock buys they were being secretly paid to promote. People are figuring out the investing game is frequently rigged and are flocking to index funds and abandoning analysts.
Not only do analysts not know where the market is headed in the short term, they don’t even have an idea of which asset class will do well next. Will it be stocks, bonds, the S&P 500, or transportation stocks? They just don’t know, and I certainly don’t know, either.
This brings us back to maintaining your focus on our overall investment portfolio and your asset allocations. This is much more profitable than worrying about short-term market directions. No matter what predictions you hear, maintain your commitment to your set portfolio’s asset allocations and make sure your investments are as diverse as possible to reduce your overall risk.
—Larry Faulkner