A Reader Offers Help

A reader, wanting to be helpful, sent me this e-mail:

Hi rod roth, Your friend, ……., has recommended this article entitled ‘Market Forecasters Are Like Blind Squirrels…‘ to you:

Market Forecasters Are Like Blind Squirrels… Posted By Barry Ritholtz On July 20, 2015 (6:30 am) In Analysts, Mathematics, Really, really bad calls

Earlier this summer, I tweeted a wonderful line from Brett Arends column, 25 things I wish I knew when I graduated from high school:

3 simple rules will explain 99% of human behavior 1: Most people don’t think. 2: Some people are jerks. 3: Everyone is selling something.

— Barry Ritholtz (@ritholtz) June 15, 2015

That led to a delightful column last week from Michael Johnston’s A Visual History of Market Crash Predictions.

Here are some of the more egregious calls, but the entire article is well worth your time to read:

bad calls

I, of course, appreciated the help. Here is my reply:

Hi ….,

I’ve not read the full Ritholtz article you sent, but glancing at the headlines, I imagine his clients are traders. As you know, I do trade, but my blog is not about trading.

I have one objective in my essays: to describe for myself the conditions under which I will recommend to Cindy that she invest her life savings. I use metrics on valuation and sentiment for that determination. I also use probability to anticipate when there might be such an opportunity.

Thus far, my studies in probability have not yielded a true forecast, and my evaluation of conditions continue to argue for remaining in cash. It would be nice if an investment opportunity came soon, but markets have a way of holding up longer than reasonable. I went through that from “66 to ’73, and the real opportunity—the chance to get in when the market got thoroughly liquidated didn’t come until mid ’74.

If I have any certainty about my work, it is that the cycle from extreme low valuation to extreme high and back again is immutable because it is driven by human behavior. So I’m looking for another ’74. When it comes, Cindy will be able to put her money to work in something like Vanguard’s S&P 500 index fund. She’ll be buying extreme value: a P/E ratio of 5 times trailing earnings or less and the book value will be more than the share price. She’ll get dividends in the range of 10-15% per annum, which she can reinvest until she needs income to live on. Then she will have an investment position that will not require any attention on her part for the remainder of her life. This will be good, because I would not like it if she had to rely on a banker, broker or investment advisor for guidance.

A “market call” is an exercise in timing. I have not in fifty years of involvement in the markets seen anyone make consistently good timing calls. Richard Russell used to say, “Watch a market timer who has been wrong for a while. He is probably about to be right.” I think this is because methodologies are better in some markets than others. In my futures trading, I do better in trending markets than swing markets. At any rate, if you are interested in timing the market, now may be a good time to watch the guys that have been wrong.

My effort for Cindy is not about timing. It is to patiently wait until I can give her the best opportunity to take risk. My sentiment and valuation studies, predictably, have gotten worse with each rise in the market. History tells us that the more extreme valuations get to in the bull phase, the more extreme they will get at the next bottom. Makes waiting all the more interesting.

Cheers,

Rod

No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

 

 

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