Here’s a review of the “where to invest now” advice offered by the country’s leading financial magazines at the start of 2008:
To help its readers navigate an uncertain market, BusinessWeek sought out guru Elaine Garzarelli, best known for advising her clients to sell just before the 1987 stock market crash. The “extremely bullish” Garzarelli, whose early 2008 models showed the S&P 500 to be “undervalued by 25%,” urged investors to load up on Lehman Brothers, Bear Stearns and Merrill Lynch. 1 Oops.
In early January 2008, Fortune interviewed successful former hedge fund manager, globetrotting author and commodities bull Jim Rogers for tips on where to invest in 2008. Rogers favored commodities (“the commodities bull market still has years to go”
and China (“there are gigantic opportunities in China”
.2 In fairness to Mr. Rogers, he was making long-term recommendations, not a 12-month forecast. Investors who over-weighted their portfolios with either commodities (down 37% in 2008) or Chinese stocks (down 51%) are still hoping he is right.
For its annual “Where to Invest” issue, SmartMoney asked a prominent Wall Street strategist to help recommend stocks of companies “likely to increase profits in a world filled with trouble spots.”3 Unfortunately for followers of the magazine’s advice, the average share price decline from recommendation date through year-end 2008 for the dozen stocks listed was 52.4%, more than fifteen percentage points below that of the S&P 500 Index.
Longtime Forbes columnist, author and money manager Ken Fisher looked into his crystal ball and recommended “a whole new type of stock for 2008,” presumably one which could flourish in a year which was more likely to see a “robust market than a bust one.”4 From the January recommendation date through the end of the year, Fisher’s five stock selections plummeted 55%, on average, far worse than the U.S. market’s 37% slide.
So, the next time you read an “expert” forecast, remember the words of legendary investor Warren Buffett:
“A prediction about the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting.”
Last year was a disaster for many investors, but at least two managers can actually claim they predicted the crash. Both Robert Rodriguez, renowned manager of the FPA Capital fund, and Peter Schiff of Euro Pacific Capital accurately predicted the decline of the past 18 months. Did their prescient forecasts pay off for investors?
As far back as 2005, Robert Rodriguez bemoaned the “investment foolishness” in the market, noted the “financial strains” at Fannie Mae, Freddie Mac and identified problems in the real estate market.5 In June of 2007, Rodriguez delivered a speech to a group of financial analysts in which he outlined how the stock, bond, private-equity and hedge-fund markets were all caught up in “a speculative bubble”. In December 2007, Rodriguez was so worried the credit crunch would cause a severe recession, he temporarily halted all stock purchases in his fund. By March 2008, cash had swelled to more than 40% of the stock fund’s total assets.6
For these spot-on predictions, Money Magazine declared Rodriguez to be “the best fund manager of our time.”7 How were FPA Capital Fund shareholders rewarded for Rodriquez’ prophetic calls? Unfortunately, not so well. The fund lost 35% in 2008. Perhaps not the result investors had hoped for from someone who predicted the future.
The financial media’s praise of Rodriguez may take second fiddle, however, to the buzz surrounding Peter Schiff, president of brokerage firm Euro Pacific Capital. He gained attention on major television networks in 2006 and 2007 with his bold forecast of over-leveraged American consumers leading the U.S. economy into recession.
In 2007 Schiff authored a book, Crash Proof: How to Profit from the Coming Economic Collapse, in which he recommended investors pile into gold, commodities and high-dividend paying foreign stocks. As conditions in the U.S. economy and the markets deteriorated, his predictions brought him fame as an economic guru who could help shelter investors from the storm. Nervous investors poured money into accounts with Schiff’s firm.
Sadly, for investors hoping to profit from Schiff’s advice, 2008 made mincemeat of their portfolios.8 Many Euro Pacific customers attested to losing 50% or more, much worse than the 37% drop in the U.S. market. This was due, in part, to Schiff’s expectation that the weakening U.S. economy would cause the U.S. dollar to depreciate rapidly, providing an extra boost to shares of international investments. Instead, the dollar advanced, magnifying the already steep losses in the international markets into which Schiff so aggressively steered his clients.
These examples highlight the difficulty of a market-timing strategy even for the smartest (or luckiest) of investors and provide a lesson for the rest of us: When it comes to trying to beat the market, even correctly predicting the future may not be enough.
1 Tergesen, Anne. “What the Pros are Saying.” BusinessWeek, December 20, 2007.
2 O’Keefe, Brian. “Hog Wild for China.” Fortune, December 24, 2007.
3 Pearlman, Russell. “Where to Invest in 2008.” SmartMoney, December 17, 2008.
4 Fisher, Ken. “We’re Too Gloomy.”
www.forbes.com/forbes/2008/0128/106.html . January 28, 2008. Accessed February 18, 2009.
5 Gullapalli, Diya. “Manager Foresaw Crisis—but Didn’t Avoid Big Losses.” Wall Street Journal, January 5, 2009.
6 Annual Report, March 31, 2008. FPA Capital Fund, Inc.
7 Zweig, Jason. “The best fund manager of our time.” Money, April 8, 2008.
8 Patterson, Scott, Joanna Slater and Craig Karmin. “Right Forecast by Schiff, Wrong Plan?” The Wall Street Journal, January 30, 2009.
