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Thursday, September 5, 2013

You’re a sucker to believe Wall Street


CHAPEL HILL, N.C. (MarketWatch) — You’re a sucker to believe Wall Street’s current mantra that another Lehman Brothers-like collapse is not in the cards.

I say that not because I think such a collapse is imminent, though I am less sanguine than many right now. The reason I say we shouldn’t believe Wall Street is that they were also telling us not to worry five years ago, right before Lehman declared bankruptcy.

Lehman Brothers filed for bankruptcy on Sept. 15, 2008. That, in turn, triggered the near collapse of the entire financial system: The stock market quickly entered into one of its worst two-month stretches in U.S. history.

If ever there were a time for Wall Street’s gurus to warn us of the impending doom, that would have been the time.

But that’s not what I found upon reviewing what the several hundred advisers I track were saying in those crucial weeks prior to that financial tsunami. On the contrary, with very few exceptions, they were remarkably complacent at that time — if not downright upbeat.

Consider the following sampling of comments from late August and early September of 2008:

“I am ready to be a bull again! ... [T]he exact time is still difficult to tell, and we will in all likelihood be early to the game, but three crucial elements necessary for a new bull market are getting our attention. The housing market is beginning to show serious signs of a bottom… Quietly, the financial sector has been slowly healing.”

“The stock market and the economy continue to battle the same demons. They are not going away easily, though one would have to think the sub-prime mess is largely behind us… I think a 75% invested posture is about right at this juncture.”

“For the next few weeks at least, the sun seems destined to shine on the stock market.”

“With oil and gas and ag commodity prices coming down, consumers are eventually going to get some much needed breathing room. This will also allow the economy to regain its footing and begin a recovery, especially once the 6-year cycle bottoms in September. The bear market in crude oil will help to improve consumer spending and should also bolster the stock market from here.”

I could go on and on, but you get the point.

(And, to be clear, I selected these quotations to make that point; I’m sure I could have found other quotations from at least many of them that don’t make them, in retrospect, look so foolish.)

Clearly, Warren Buffett was right when he famously said that one of the primary purposes of stock market forecasters is to make fortune tellers look good.

To be sure, some advisers acquitted themselves well in that crucial period in advance of Lehman Brothers’ collapse five years ago. The service that I suspect came closest to forecasting what was about to take place was The Elliott Wave Financial Forecast, published by Robert Prechter and edited by Steve Hochberg and Pete Kendall.

In their September 2008 issue, received at the end of August, the editors wrote: “The stock market is building up the necessary reserves for its next major move, a third wave decline at multiple degrees of trend. This should be the strongest decline of the bear market to date.”

They were spot on, of course.

Unfortunately, the shine on this on-target forecast starts to wear off when we remember that this was not the only time the service had been bearish. On the contrary, it had been almost uninterruptedly bearish — sometimes aggressively so — for the nearly two decades prior, and, as a result, according to the Hulbert Financial Digest, was near the bottom of the rankings for market timing performance over those two decades.

Another editor whose writings in early September 2008 certainly appear clairvoyant is Richard Russell, editor of Dow Theory Letters. At the beginning of September 2008, when the Dow Jones Industrial Average was around 11,500, Russell wrote: “the Dow MUST remain above 10961 on a closing basis. Breaking the Dow level set on July 15 would be catastrophic!”

That level was broken on Sept. 15, the day Lehman filed for bankruptcy. Again, not bad.

But before you give Russell too much credit for that call, consider this: Four months’ previously, he was forecasting an “epic” bull market that would take the market averages to new all-time highs somewhere between then and 2010.

This isn’t to say that there are no good investment advisers, let me hasten to say. But what makes them good is not their predictions but their strategies for dealing with an uncertain future. In fact, the best market timers I track don’t even bother with making predictions. They instead have the discipline to stick with their long-standing market timing systems through thick and thin.

Remember that the next time you hear some bold prediction from yet another talking head on Wall Street. Don’t let it derail your well-laid investment plans.

Mark Hulbert is the founder of Hulbert Financial Digest in Chapel Hill, N.C. He has been tracking the advice of more than 160 financial newsletters since 1980. Follow him on Twitter @MktwHulbert.

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