Independent allocation advice grounded in history not hype

TSP Smart®  
  & Vanguard Smart Investor

Opinion: Wall Street ‘experts’ have missed every stock market crash in 20 years

Published: Aug 24, 2015 10:49 a.m. ET

Have you noticed that your broker didn’t warn you about the market decline?

Getty Images
Jamie Dimon, left, CEO of J.P. Morgan, and Lloyd Blankfein, head of Goldman Sachs

I don’t know what the stock market is going to do next, and nor does anybody else.

But here are 10 things that Wall Street’s alleged experts won’t tell you, but should.

1. “Our investment forecasts are bogus.”

All those spreadsheets and charts telling you that stocks produce “average returns of 9% a year”? They’re based on completely faulty math. Yes, they use “historic data.” But they misuse the data. Stocks in the past only produced such “average returns” because of three reasons: inflation, bargain stock prices and high dividend yields. None of those three factors are at play today. Based on the real math, real logic and real use of past data, calculations once produced by Wall Street legends Rob Arnott and the late Peter Bernstein suggest U.S. shares today may only earn 3% or 4% a year in real, purchasing-power terms.

2. “We only agree because we have to.”

Yes, every investment “expert” seems to parrot the same cheerful things as every other. But if you think that’s because they all independently reached the same conclusions, you’re dreaming. They have to agree. Professionally, it is far better to be wrong en masse than right independently. And, legally, one of the ways to avoid being sued is just to do what all your competitors are doing, no matter how wise or foolish it may be. “Your honor, everyone in the industry was doing the same thing” is an actual defense, even if you bankrupted your client.

3. “We don’t know anything about history.”

Wall Street experts like to cite historical data to validate their strategy and analysis. The problem? They actually know little about financial history, and understand even less. Most of their “historical data” come from the past few decades, an unprecedented era that will tell you completely different things about stocks, bonds and the economy than other periods will. Historically, a few decades’ worth of data is nothing — a mere snapshot in time. Even data going back to World War II, or the 1920s, isn’t enough to draw too many long-term conclusions. No serious historian would be so foolish.

4. “We’ve missed every crash.”

It is worth remembering that twice in the past 20 years, the U.S. stock market has fallen by about half. And on both occasions, most Wall Street “experts” were taken completely by surprise. They also failed to predict the housing bust — most of them, indeed, cited “history” to say that it couldn’t happen. A majority of economists polled in early 2008 failed to predict the biggest recession in 70 years, even though it had already begun. All the experts at the International Monetary Fund completely failed to predict the financial crisis as well. And since 2011, most Wall Street experts have missed the crashes in emerging market stocks and commodities as well. Generally, the only people who successfully predict a coming crash are dismissed by the rest of Wall Street as cranks, eccentrics and losers — until it’s too late.

5. “Your wealth is not our No. 1 priority.”

I don’t mean to be cynical, but Wall Street’s top priority is not to protect your wealth. It’s to protect their own. That’s just human nature. Wall Street’s experts are all worrying about putting their own kids and grandkids through college and securing their own retirement. And that means they have to go along to get along. It’s not that they don’t care about you at all. It’s just that, unfortunately, you come second. And that makes all the difference.

(On the next page, read five more things Wall Street won’t tell you about investing.)

6. “Your balanced portfolio can fail.”

It is conventional wisdom on Wall Street that a “balanced portfolio” of stocks and bonds will protect you, because even if stocks go down, then bonds will go up. The problem? It’s not true. It’s based on yet another misreading of history. Stocks and bonds both got hosed in the 1940s. They both got hosed in the 1970s. Today, based on history, both stocks and bonds are very expensive. Since 1982, both stocks and bonds have gone up together. And what goes up together can come down together.

7. “There is no ‘money on the sidelines’ to push the market higher.”

Wall Street experts are fond of saying that the stock market is bound to go higher shortly because there is so much “money on the sidelines, waiting to come into the market,” and that will drive up prices. But this is actually a total lie. There is no such thing as money on the sidelines. That’s because for every stock bought, one must be sold. If I have $100 “on the sidelines” and you have a share in Apple AAPL, -0.35% and I buy your share, what happens? I end up with a share in Apple … and you end up with my $100. Nothing’s changed.

8. “The best investments are the ones we won’t tell you about.”

The biggest conspiracy on Wall Street is the one hiding in plain sight. The best long-term investments must, by definition, be those that are cheapest in relation to their fundamental worth. That was true, for example, of emerging markets in the late 1990s (after the Asian crisis), “old economy” non-dot-coms in 1999 (during the Internet bubble), dot-coms in 2003 (after the crash) and housing in 2010-12 (after that crash too). But guess what? Those are exactly the investments that Wall Street can never and will never recommend, because the professional risk to them is too great. If they recommend you buy today’s most hated assets and you make a fortune, they don’t get the upside. But if they recommend you buy today’s most hated assets and those assets fall further, they’ll get fired and you’ll sue. So instead, they will recommend you invest in the things that everyone else likes. Make of it what you will, but right now everyone is running away from emerging market stocks and currencies and anything to do with commodities.

9. “The better the market, the worse the outlook.”

Have you been watching the market go up and up and up? Are you afraid of “missing out” on further gains? Do you want to “put your money to work”? Wall Street loves you. But the logic is absolutely upside down. The stock market is just a claim on companies’ future income. And despite what people think, that future income isn’t going to vary by much, regardless of what happens to the economy in the short term. The net result: The higher the stock market, the worse an investment it becomes. The time to buy is when no one wants to.

10. “Another crisis is just around the corner.”

If you missed the last big buying opportunity, don’t panic — another one will probably come along shortly. Wall Street likes to pretend that today’s modern economy, with its MBAs and CFAs, PhDs and other experts, has pretty much relegated financial turmoil and chaos to the bad old days. But it’s untrue. Actually, the past 20 years have seen more turmoil than the previous period, not less. The late Hyman Minsky, an economist, argued that crises are part of human nature. When things go well, people just get complacent and take more and more risks. J.P. Morgan JPM, +0.17%  CEO Jamie Dimon acknowledged to Congress after 2008 that financial crises come along pretty much every five to seven years. The Book of Genesis suggested much the same thing several thousand years ago. The historical record bears them both out. But you won’t hear it from Wall Street.

Original Post  24 August 2015 Market Watch

This website provides a commercial service and is not affiliated with the Thrift Savings Plan administration.  Recommendations are based on our best judgment and opinions but no warranty is given or implied.  Past performance does not guarantee future performance or prevent losses.   All readers and subscribers agree to this website's Terms of Use and Investment Disclaimer.   Copyright © 2011-2021 Ravenstone Research Inc.  All Rights Reserved.  


Powered by Wild Apricot Membership Software