The headline above a CNBC report from the poetically named Berkeley Lovelace Jr. (surely that name rightfully belongs to a down-at-the-heels aristocrat in a 19th-century novel) reads: “40-year veteran of Wall Street with an knack for market timing calls a bottom in stocks.”
I did the thing I always do when I hear about somebody who has an uncanny gift for market timing: I check to see whether he is the richest man in the world. The gentleman in question, Jeffrey Saut, is not. He is, in fact, only an employee of Raymond James Financial. People who actually have a knack for market timing — and, long term, those are as elusive as yeti — are not anybody’s employee.
Lovelace’s account is better than that of his headline writer. CNBC does a lot of very good work, but the outlet — and the financial media at large — often does a disservice by trying to sex up the boring old business news with tall tales of pinstriped prophets and NASDAQ Nostradami. The long-term evidence suggests very strongly that nobody is actually very good at timing the market in more general terms, much less calling definitive tops and bottoms in the way the CNBC headline expects.
The myths of can’t-miss investment advice, secret investments known only to insiders, etc., distort the expectations of ordinary investors (and some professional investors) regarding what results they might reasonably hope to see from their investments and savings. Magical thinking about can’t-miss investments was the underlying cause of the financial crisis of 2008-09, as mortgage borrowers, house-flippers, and institutional investors alike all make enormous bets — bets they could not afford to lose — on the theory that used houses are a magical commodity the price of which moves only in one direction — up.
Intelligent people such as Jeffrey Saut know this. Here is Saut himself on December 10th writing about the recent decline in stocks: “Being wrong and admitting it is a good strategy, yet very few pundits on Wall Street actually admit to being wrong. To that point, we did not see the current decline coming, and neither did our models.”
If anything, Saut himself seems to be a model of humility. He quotes at length from Peter Bernstein:
After 28 years at this post, and 22 years before this in money management, I can sum up whatever wisdom I have accumulated this way: The trick is not to be the hottest stock-picker, the winning forecaster, or the developer of the neatest model; such victories are transient. The trick is to survive. Performing that trick requires a strong stomach for being wrong, because we are all going to be wrong more often than we expect. The future is not ours to know. But it helps to know that being wrong is inevitable and normal, not some terrible tragedy, not some awful failing in reasoning, not even bad luck in most instances. Being wrong comes with the franchise of an activity whose outcome depends on an unknown future (maybe the real trick is persuading clients of that inexorable truth). Look around at the long-term survivors at this business and think of the much larger number of colorful characters who were once in the headlines, but who have since disappeared from the scene.
It should be instructive to the ordinary investor that many of the best and brightest minds on Wall Street dedicate their days to the business of hedging — i.e., working from the expectation that many of the cleverest investments that their colleagues can devise are likely to fail and finding ways to mitigate those failures. They worry a great deal about correlation, the fact that certain kinds of assets tend to move in tandem with one another. Their job is the management of risk, and very wealthy individuals and institutional investors pay them a great deal of money for that service.
Keep that in mind the next time your brother-in-law calls up and says that some genius called a bottom for stocks on CNBC and suggests you put all your money into stocks right now because it’s a can’t-miss opportunity.
Individual investors, like political partisans, come in two main varieties: the ones with modest expectations, and the chumps.