“We really can’t forecast all that well and yet we pretend that we can, but we really can’t.”
– Alan Greenspan to Jon Stewart in a 2013 interview
Scientist Neils Bohr said that “prediction is very difficult, especially if it is about the future.” Yet it seems that financial experts and publications just can’t stop trying to make predictions anyway.
One article on MarketWatch.com warns that the S&P 500 will fall below 700 while another gives reasons why we’ll see a see a big rally just as soon as this little “correction” is over.
Yesterday, the mood in the market was optimistic and the S&P 500 seemed poised to reach new highs. Today, after the Brexit vote, the financial media is full of panicked predictions of how the economy will be impacted for years to come.
Financial experts get it wrong all the time. We just don’t know who will get it right until we can see the hindsight view.
Five Famous Investors and Financial Experts (who didn’t have crystal balls)
Pershing Square Holding’s Bill Ackman has made some very savvy investments in the past. He was one of a handful of hedge fund managers who correctly predicted the crisis, shorting mortgage-backed CDOs. His fund was also flying high with multiple double-digit returns in 2014.
Then a couple of disastrous bets – large positions for Valeant Pharmaceuticals (the “pharmaceutical Enron”) and against Herbalife, which Ackman maintains is a pyramid scheme, cut Pershing Square down to size with losses exceeding 50% between August 2015 and March 2016. A pro-Herbalife website erected in self-defense features an article dedicated to the worst of Ackman’s investment debacles, “When Ackman’s Wrong, He’s Really Wrong.”
In the second quarter of 2015, hedge fund manager James Altucher published an article titled, “Why the Stock Market is a Sucker’s Game Right Now (and What Stocks I Own).” Six months later, a reader commented, noticing that most of the recommended stocks had tanked since the article was written.
Even the most respected investors, such as Warren Buffet, miss the mark by a mile sometimes. During the Great Recession, Berkshire Hathaway shares lost 32% (although it did “beat the market,” with the S&P losing an even worse 38.5% in 2008). In 2015, the Sage of Omaha was not so lucky, watching BRK values plummet roughly 12%, while the S&P 500 lost just less than 1%.
Apparently, celebrity status doesn’t necessarily improve one’s ability to predict the future. Suze Orman tirelessly urges Americans to get and stay in the stock market, yet she doesn’t trust her own money in it! She confessed she only dares to keep 3% of her assets – an amount she can easily afford to lose – in the market, relying on municipal bonds for slow but safer returns. (At least she knows she doesn’t have a crystal ball.)
According to Wharton School researchers, Mad Money host Jim Cramer’s stock recommendations have underperformed the market, earning a cumulative 64.5% over the last 15 years, versus 70% for the S&P 500 when adjusted for reinvested dividends, said the study. (Without the dividends, the S&P 500 earned only a shocking 2.44% compound annual growth rate in the 15 years from January 1, 2001, to January 1, 2016, according to our own calculations using historical S&P values.)
Cramer’s Action Alerts Plus portfolio got off to a good start prior to the 2008 meltdown, though the results of this hand-picked portfolio have trailed the S&P significantly in some recent years. As reported by MarketWatch.com on May 16, 2016, the portfolio fell 9.5% in 2011, while the S&P 500 was unmoved. In 2014, the Action Alerts Plus portfolio rose just 1.3% in 2014, versus an 11.4% increase for the S&P.
Rage Against the Machine
The Wharton researchers released their working report on Cramer’s stock predictions May 16, 2016 to coincide with the release of Money Monster, the latest movie revolving around a Wall Street plot. Directed by Jodie Foster, it stars George Clooney as Lee Gates, a fictitious Cramer-like financial show personality who turns stock-picking into prime time entertainment. Gates finds himself held hostage by a bomb-vest-wearing investor who lost his entire savings as well as his cool when one of Lee’s recommended stocks went suddenly bust in a “technical glitch.”
The plot isn’t as far-fetched as it sounds. During the May 6, 2010 Flash Crash saw some ETFs were traded for as little as 10 cents – or less – before pricing normalized, according to Emarotta.com.
A sign of the times, the movie plays out the frustrations of investors on the big screen with a loaded gun and a dubiously wired suicide vest. “Hating on Wall Street is the new national pastime,” writes Rolling Stone’s Peter Travers in a Money Monster review. Between speed trading market skimming, government-mandated bail-outs, big bank price fixing scandals, and “pump and dump” stock schemes that manipulate supply and demand, many American investors have lost their faith in a market that increasingly resembles a rigged casino.
The Problem with Predicting the Future
Let’s face it – the way “investing” is typically thought about and done, it is actually speculation at best. Seen through this lens, the never-ending stock tips and market predictions that infiltrate the lives of anyone who pays attention to TV, radio and print are almost comical. Many people love to gamble in Vegas, too, but we don’t have a media-pumped industry covering predictions on which casino will deliver the next big jackpot on every major news station.
Why are such predictions all the rage? Perhaps because it keeps people investing, which makes Wall Street advertisers happy. Perhaps because no one knows what will actually happen, and the stakes are high, involving personal retirement accounts. Money managers and active investors obsess over “beating the market,” and even those who sustain enormous losses tend to remain in the game like teenagers determined to better their video game score “next time.”
Yet financial crashes can come as a surprise, even to financial experts and insiders. The 2008-2009 financial collapse ambushed 99% of investors, analysts, money managers, regulators, even the Federal Reserve. Optimism ruled the day, even as mortgages defaults and an over-leveraged financial system teetered on the brink of disaster. Alan Greenspan and Hank Paulson didn’t see it coming, even days before.
Expert investors and financial professionals fared no better. Buffet admits he was completely surprised by the crisis. Some fund managers were simply put out of business, and the great majority of money managers felt helpless to curb the losses in their client’s portfolios.
Kick the Speculating Habit
If the “experts” can’t get it right, and if Wall Street isn’t to be trusted, what SHOULD we do with our hard-earned dollars?
The answer lies in what we SHOULDN’T be doing with our money.
First and foremost, we should STOP SPECULATING.
Forget the formulas, skip the speculation, and just say no to sleepless nights of wondering what the market will do next.
Invest in things that only go up.
It sounds impossibly simple. You might be thinking, “Yeah right, if only I could do that!”
But you can. You just have to give up one financially fatal habit…
You must STOP SPECULATING.
We have been conditioned to expect that the very nature of investing is guesswork and gambling, but this is only the lie that keeps us trying to game a system that is rigged against us.
The financial crisis was made possible because of speculators. Every market bubble and subsequent market crash has been fueled by speculation. And our attempts to “speculate better” only backfire. They cannot put us on solid financial ground, because the nature of speculation is RISK.
Speculation is not a financial solution, it is the problem.
A firm financial foundation cannot be built on hopes and guesswork.
So, what IS an investor to do?
One solution: Stop speculating about tomorrow’s returns; collect cash today.
“Cash is king,” goes the saying. It means that we should pay attention to cash flow, rather than guessing and hoping that prices will rise. Instead of speculating about markets, use your assets to generate cash flow.
Rental real estate is one popular way of doing this, when purchased for income and not appreciation. Peer to peer lending provides an avenue for newbies to start generating cash flow with very modest investment amounts. Dividend-paying stocks and life insurance policies also offer cash flow.
Our favorite strategy for generating reliable monthly income is investing in commercial and investment bridge loans through carefully vetted companies. We only work with companies who demonstrate effective strategies for minimizing risk and a proven track record of steady payments. The returns can be healthy, especially for accredited investors, and you never have to fix a broken toilet.
For an overview of bridge loan investing, see “Bridge Loans and Hard Money: An Investment Opportunity?”
Another solution: Stop speculating about stock prices; buy non-correlated assets that perform in any market.
Stop guessing where the market is going to go and purchase assets not at the mercy of stock market moods or interest rate adjustments. Better yet, purchase assets that have a known higher future value!
For growth not correlated with ANY financial market, we recommend life settlement investment funds. Once reserved for institutional investors only, now life settlements are available to accredited investors who wish to take advantage of the secondary market for life insurance policies. Policies can be sold as an asset, much like a deed of trust, a right established by the 1911 Supreme Court ruling on Grigsby vs. Russell.
In a life settlement, policies that are no longer wanted or needed are purchased from elderly seniors who would rather have cash now than a death benefit later. The sellers may have multiple policies, health or financial troubles, or perhaps they have simply outlived their spouse or heirs. The sale of the policy turns a life insurance death benefit into a living benefit for the insured. At the same time, life settlements provide solid returns for investors drawn to the stability of the life insurance industry, non-correlated returns, and win-win investments.
Find out more about life settlements by reading “Life Settlement Investments: Pros, Cons and Facts,” listening to the podcast, “An Introduction to Life Settlements.” or by contacting Partners for Prosperity.
The bottom line: Financial experts can’t predict the future, and neither can you. Therefore, choose financial strategies that can succeed without requiring “experts” to forecast market conditions. Sleep soundly by saving more, avoiding risk, and investing rather than speculating.
LEARN MORE, GET FREE STUFF! For more information about bridge loan investments, life settlement funds, and why we say that “Financial Planning Has Failed,” download our complimentary Prosperity Accelerator Pack.