On the financial news the morning of August 8, 2020, Mohamed Aly El-Erian, who is the chief economic adviser at Allianz, warned that the biggest risk to the stock market investment rally is corporate bankruptcies but, quote, “otherwise, you have a very strong technical supporting this marketplace”.
That is interesting. This is coming from a man who was taking a pessimistic approach to the markets until recently. He suggested that this time it’s different, which are the four most dangerous words in stock market investment – to quote John Templeton – when this crisis started.
This isn’t to point the finger at El-Erian specifically. The advisory group CXO looked at various predictions made on various financial shows like CNBC and Bloomberg. Their objectives were to see if you could beat the return of the stock market following various pundits and “gurus”.
If people can’t beat the market listening to pundits, then why do many keep paying attention to media pundits, when following their advice is likely to offer zero value-added in the long-term?”
Should you listen to pundits for stock market investment advice?
They found that Marc Faber was the least successful, being right only 44 percent of the time. The most successful was Ken Fisher, but his 66 percent “strike rate” was below the 74 percent threshold which Nobel Laureate William Sharpe identified in his 1975 paper called ‘Likely Gains from Market Timing’ as being sufficient to time the stock market.
Or put in another way, if you try to find the right time to enter the stock market, you can be wrong up to 26 percent of the time. That means that even if you are right 70 percent of the time, and wrong on 30 percent of occasions, you are better off just buying and holding.
The reasons are simple enough to understand – one or two wrong moves can be disastrous for your portfolio; you can’t reinvest dividends if you are out of the market and buy and hold investors can also rebalance their portfolios during stock market downturns. By rebalancing, I mean a well-diversified investor that isn’t market timing can sell some government bonds, which tend to rise during crises like the 2008 economic recession and March 2020 and buy undervalued opportunities in the stocks market.
If people can’t beat the market listening to pundits, then why do many keep paying attention to media pundits, when following their advice is likely to offer zero value-added in the long-term?
The biggest reasons are that people love to be entertained and hear stories. It is human nature, after all, to assume that things can’t happen randomly.
So, people like to over-analyze and find correlations that don’t exist. The fact that there is little or no correlation between stock markets and GDP growth, unemployment, and the economy at large does sound counter-intuitive but it is true.
Beyond that, it is hard to forget how strong human emotions like fear are. It is estimated that fear is at least twice as powerful as greed.
During moments like 2008-2009 and March 2020, when stock markets are falling due to a new unknown like a lockdown, it is easy for investors to get carried away with themselves. Steve Forbes, who is the owner of course of Forbes Magazines, was quoted as saying “you make more money selling advice (in this business) than following it. It’s the one thing we count on in the magazine business – along with the short memories of our readers”.
The last point is key. Most people have forgotten about all the wrong predictions that columnists writing in Forbes and other magazines, financial news channels and mainstream media outlets have made down the years. It is far more profitable to ignore the media or assume it is entertainment than trading your own account based on the news.
Buy and hold, Exercise emotional control
Proof of that comes with performance. Do you know which group of people outperform Noble Prize winners, PhDs in finance, most finance professionals, and almost all do it yourself (DIY) investors? The dead! The dead don’t panic sell. The dead don’t watch the media every time there is a financial crash. The dead aren’t worried about the 2020 US Election affecting markets.
In other words, the dead buy and hold because they have no alternative. Long-term, that is profitable. I have no doubt that some of the most successful living investors are those in prison, for the same reason – they can’t panic sell unless they are given an internet connection whilst inside.
The point being that emotional control is what is key in investing, not knowledge alone. Some of the worst investors I know have high-level financial qualifications. One of the key ways to increase your emotional control is to switch off most sections of the media, and seldom check your investment valuations.
And remember that past predictions are no induction of future correct predictions. Nouriel Roubini and Peter Schiff both predicted the 2008-2009 financial crisis. Yet one claimed that “cash is king” during the lowest point for global stock markets, and another thought gold prices would hit USD5,000 a few years later, with the US facing hyperinflation in consumer prices.
So be skeptical next time a guest is introduced with the line that “he predicted 2008” or any other event.
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