What the End of the World Teaches Us About Investing

Armageddon

There have been many predictions of Armageddon throughout human history and, so far, all have been a bit exaggerated.

Sometimes several apocalyptic false alarms come from the same person, such as Pastor Charles Taze Russell, who predicted the end of the world in 1914, based on careful calculations. When the world didn’t end, he updated his calculations, according to the book History’s Worst Predictions (Chartwell Books, 2011), predicting it would end in 1915, 1918, 1920, 1925, 1941, 1975 and 1994. This is pretty amazing, considering he died in 1916. See, he was so charismatic that followers updated his calculations for decades. It mattered little how wrong his previous prophecies had been.

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What does this have to do with investing? Well, the financial media has its own charismatic experts who give us prophecies on what the stock market will do or what the next hot stock will be. They too have huge followings, and people do bet their nest eggs based on the sage advice.

Take CNBC’s Jim Cramer, for example. A high-profile pundit who, as it teetered on the brink of financial collapse, predicted, “No, no, no, Bear Stearns is fine!” A week later, Bear Stearns was free-falling into extinction and Comedy Central’s Jon Stewart roasted him like a chestnut. Later, he came out with two stocks to sell, sell, sell immediately: Hewlett-Packard and Best Buy. They were the third and fourth best performers of the S&P 500 over the next year, quite statistically improbable. Where are Jim Cramer and his horrific predictions today? He’s still the host of CNBC’s Mad Money with a huge following.

Then there’s best-selling author Harry Dent Jr., who I freely admit has done brilliant demographic calculations on the aging of Americans to predict the stock market. Despite the brilliance of his analysis, I don’t know anyone who has been so consistently wrong in predicting the stock market. In 2004, he predicted the Dow Jones Industrial Average would be as high as 40,000 by 2009. It plummeted to as low as 6,547. After the plunge, he updated his prediction in the book The Great Depression Ahead (Free Press, 2009) to Dow 3,800 — then it surged. Yet his books remain best-sellers and I receive regular emails touting his predictions.

Still, neither Cramer nor Dent has anything special over the nation’s top economists. Nearly all predicted rate increases in 2014, and rates declined instead. In fact, according to academic studies, these economists have predicted the direction of interest rates correctly far less often than a coin flip.

Armageddon and market forecasters

Pastor Russell, Jim Cramer and Harry Dent Jr. share the qualities of being charismatic and smart, which allowed them to create large followings. One significant difference between Russell and the financial prognosticators, however, is that it was clear Russell was wrong, while few go back to check stock market forecasts. At least Russell had to explain why his calculations were wrong, but I rarely see a market forecaster do the same. Perhaps, a book entitled History’s Worst Stock Forecasts could have a place.

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Three lessons

So what lessons can we take away from all this?

  • First, like Pastor Russell, market forecasters are charismatic. Even before their arguments are heard, they display a demeanor of expertise.
  • Second, their logic is always compelling, whether it’s the precision of end-of-days calculations or the reasons why markets or stocks must move up or down. Their forecasts are often adamant, and so is their advice on what you must do today. And they firmly believe in their forecasts — which is what makes what they’re saying so convincing.
  • Third, and perhaps most important, is that their track record really doesn’t matter much. Pastor Russell had followers well after his death, despite never having been right. Human beings are really good at suspending common sense in order to believe what we want to believe.

My advice

Before you bet your financial nest egg based on any market guru forecaster, find out the track record of the guru. The Internet makes it very easy. For example, it’s easy to Google:

Harry Dent track record

Jim Cramer accuracy

Track record of economists forecast of interest rates

If they have been dead wrong in the past, ask yourself why you would want to follow them this time. Then ask why they seem so darn confident in their predictions in light of past failures.

It’s a very uncomfortable feeling, knowing that we don’t know the future of markets or the next hot stock. But the illusion of control that market gurus offer is basically a mirage shimmering in the distance. And, like a mirage in the desert, it will always disappear the closer you get to it.

Author’s note: On July 19, I received an email from Harry Dent entitled “Act Now! Before the Greatest Crash in History.”

Photo: Juuce/iStock

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