Column

Beware the 'experts'

Personal Business

Ross Laver June 16 1997
Column

Beware the 'experts'

Personal Business

Ross Laver June 16 1997

Beware the 'experts'

Personal Business

Ross Laver

It isn’t hard to figure out who’s making the big money from the current upward march in North American share prices. The winners are the ones who have consistently ignored the advice of investment professionals.

Surprised? If you’re an investor, you really can’t afford to be. As this column has noted before, stock-market strategists as a group have a terrible record for predicting the market’s direction.

Consider what the experts were saying during a recent month-long sell-off that saw the Dow Jones industrial average plunge a gut-wrenching 693 points to 6,392 on April 11, wiping out all of the gains since the start of the year. Although some analysts advised their clients to treat the market’s drop as a buying opportunity, many others were predicting the onset of an extended and brutal downturn. “The trend has flipped over, and we’re headed south,” William A.

Fleckenstein, a principal with Seattle-based Fleckenstein Capital, declared in the pages of The Wall Street Journal on April 7. On the morning of April 14, the same newspaper warned that there appeared to be “little chance the gloom will lift anytime soon.”

But the gloom did lift—beginning with a 60-point bounce that very day. Since then, the Dow has continued its upward climb, smashing through its earlier peak and setting a new record last week of 7,437. The performance of the Toronto Stock Exchange 300 composite index since early April has been only slightly less impressive, rising 11.5 per cent to close last week at a new record high of 6,492.

None of this is meant to imply that the current bull market will carry on indefinitely. The wonderful thing about adopting the role of stock-market Cassandra is that sooner or later, those dire predictions of a meltdown are likely to be proven right. Over the past 50 years, there have been eight socalled severe corrections—defined as a drop in average share prices of 15 per cent or more—which works out to about one

Investment strategists have a terrible record for predicting the stock market’s swings

every eight years. Eight of those corrections developed into full-fledged bear markets, which means a sustained drop of at least 20 per cent. The most recent bear market was in 1990, sparked by a recession and nervousness over Saddam Hussein’s invasion of Kuwait.

Unfortunately, individual investors seem to want to believe that the pros know how to time the market’s swings so they profit when prices rise and get out when prices drop. Virtually every study of market timing in the past few decades suggests otherwise, yet there is something comforting in the notion that somewhere, there is an expert who has it all figured out. These days, two of the most influential Wall Street gurus are Byron Wien, Morgan Stanley’s chief equity strategist, and Abby Joseph Cohen, strategist at Goldman Sachs. Happily for both, investors tend to have selective memories. In October, 1995, when the Dow was at 4,780, Cohen announced that stocks were no longer “screaming bargains,” and cut back her recommended exposure to equities to 60 per cent from 75 per cent. The following summer, with the Dow hovering around 5,600, Wien cautioned that stocks were “going to run out of upside soon” and that an impending outburst of inflation was likely to push share prices down by about four per cent.

To be fair, both Wien and Cohen have been right more often than they have been wrong in the past few years. But unless you are willing to gamble that they have some sort of unique insight, it makes sense to follow some basic rules. First, invest for the long term, resisting the temptation to buy and sell on market swings. Second, make sure your portfolio is balanced among stocks, bonds and cash investments like money-market funds. Third, establish an automatic investment plan in which a set amount of money is deposited every month in a stock mutual fund, ensuring that you continue to invest when share prices drop. And unless you want a lot of sleepless nights, try to ignore the barrage of advice from stock-market professionals.