The Persistent Pessimists

25 August 2017  |  Simon Miller
The Persistent Pessimists
Financial doom-mongers often forecast devastating price drops but in reality, they are rarely accurate.
Their gloomy predictions do little for the economy or for consumer confidence in financial ‘experts’.

Hand on heart: which of these two articles would you rather read? One titled: “No price drop in sight: the upswing on the stock exchanges continues”? Or one titled: “Save your money! The crash is coming!”? I suspect the preference would be clear. Most would snatch up the latter article and read every word to avoid the damage about to be inflicted by the ‘impending doom’. Headlines such as: “Very Quiet”, “All Going Well” or “Nothing Really Happening” are not worth the paper they are printed on. Fear just sells better.

The financial doom-mongers of the world are also well aware of this sales tool; investors, bankers and economists who repeatedly predict severe price falls and economic crises. Powerful names such as Marc Faber, Jim Rogers and Nouriel Roubini belong to this select group. They play with investors’ fears which are still hypersensitive following the crash of 2008.

Investors should be reassured that violent crashes are rare, and when they do happen, they are not as dangerous as most think. For example, while the S&P 500 (the leading US stock market index) lost 50% of its value between 2000 and 2002 (during the dot.com bubble crisis), it had recovered just five years later. Similarly, when it dropped from 1,500 points down to 700 between October 2007 to March 2009, it had recovered by March 2013, just four years later. These are considered to be two of the worst financial crises from the past four decades, yet markets recovered relatively quickly on both occasions.

“Sell Everything and Run for Your Lives”

The doom-mongers rarely give specific advice. For them, the end is always just around the corner… Take Jim Rogers as an example: the 74-year-old made his money in the 1970s and, together with George Soros, founded Quantum Funds. Just a few years later, he withdrew from the fund and travelled around the world investing on his own account. Today he lives in Singapore and bets on stocks ‘all around the world’ (see Rogers’ book: Investment Biker: Around the World with Jim Rogers). He is also very busy interviewing and spreading his gloomy predictions far and wide. These are just some of the headlines he has been responsible for since 2011:

  • “100% Chance of Crisis Worse Than 2008” (2011)
  • “It’s Going to Get Really Bad After the Next Election” (2012)
  • “You Better Run for the Hills” (2013)
  • “Sell Everything and Run for Your Lives” (2014)
  • “We’re Overdue a Stock Market Crash” (2015)
  • “Biblical Crash Dead Ahead! Jim Rogers Issues a Dire Warning” (2016)
  • “Legendary Investor Jim Rogers Expects the Worst Crash of Our Lifetime” (2017)

It turns out that those who have consistently ignored Rogers’ prophecies of doom are reaping the benefits. Equity markets have performed well since 2011; the S&P 500 is up 125 percent (in US dollar terms). Yet Rogers continues to cry his message of imminent disaster. Just this summer in an interview in the US he announced, “You should be very worried”.

The Repeat Offenders

Marc Faber feels just as strongly about these theoretical crashes, so much so that he has been nicknamed ‘Dr Doom’. He has managed to make an industry out of his miserable predictions; you’ll find his website at GloomBoomDoom.com, or you could even subscribe to his newsletter: The Gloom, Boom & Doom Report.

Faber was made famous by correctly anticipating the US stock market crash of 1987, the Asian crisis of the 90s and the bursting of the dot.com bubble. These ‘hits’ have guaranteed him a strong following and given him a form of cult status. What goes un-noticed is all the predictions he has got wrong. US analyst CXO Advisory examined all the purchase and sales tips that Faber made between 2005 – 2012. Out of a total of 150 recommendations, the Swiss financier was correct just 47 percent of the time. We should be grateful that another of Dr Doom’s predictions was wrong: in 2012 he is quoted to have said “World War Three Will Happen in the Next Five Years”.

Crash Mania

S&P 500 index (in points) and Faber’s predictions, April 2009 – February 2015

S&P 500 index (in points) and Faber’s predictions, April 2009 – February 2015

Sources: Ritholtz Wealth Management, etf.com, Bloomberg

Like Marc Faber, Nouriel Roubini also goes by the title ‘Dr Doom’, although he prefers ‘Dr Realist’. His illustrious career has included working for the World Bank, the Federal Reserve, and the International Monetary Fund and he is now a Professor at the Stern School of Business at New York University. In 2004, he famously predicted the imminent bursting of the US real estate bubble and the subsequent hard landing of the US economy. However, his predictions since then have been rather less successful: Greece has not left the eurozone and Germany has not reintroduced the Deutschmark. Neither of those forecasts look particularly likely to come to fruition.

Zero Points for the Dow

American financier Harry Dent further contributes to this gloomy group. In 2004, Dent published a book titled ‘The Next Great Bubble Boom’ in which he predicted that the Dow Jones was to rise to 40,000 by 2010, a forecast he revised down to a comparatively meagre 16,000 in 2006. However, this wasn’t the only erroneous prediction he made, his negative forecasts have been quite some way off the mark too. In 2011 he feared a halving of the US markets, followed by a year and a half long crash in 2013. Just last autumn, he warned that should Donald Trump be elected US President, markets would crash down to the same levels last seen in the early 1930s. He believed that the Dow Jones would drop by 17,000 points, bringing it down to almost zero. In practice, this would have meant that the 30 most important US corporations would have been almost worthless. ‘Glass half empty’ rings true with quite some vibrancy on this particular occasion.

The final two examples in this comedy of economic errors come from two financiers who really should have known better. One of America’s greatest ever economists, Irving Fisher, claimed in October 1929 that equities had reached a ‘permanently high plateau’. Less than two weeks later, stocks plunged and didn’t return to the highs from which they fell for 25 years. In December 2007, Abby Joseph Cohen, Goldman Sachs chief investment strategist suggested that the S&P 500 would reach 1,675 by the end of 2008… One would assume she felt rather sheepish when the S&P ended below 900.

Why do we continue to give these stock market predictions any airtime at all? The problem is that these financiers often make excellent story-tellers and their business models work well (for them). They profit by selling their stock recommendations and their own funds and since they are rarely held to account over their mistakes, the risk to their reputation is fairly low. In fact, they only really stand to gain from their statements as if you predict a crash every year, eventually, you will get it right. That particular prediction will be the one to make their name.

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So How Can Crashes Be Predicted?

The question remains: which investors should we be listening to? Remember that no one can predict the future with accuracy. The exact timing of the next crash is unknown which renders any bear market predictions deeply unhelpful. It could be tomorrow, just as easily as it could be in five years time or in 15 years. Also deeply unhelpful would be to wait for the crash to hit before investing in the capital markets. The risk of missing out on high earnings during the wait is simply too high (to find out more, please refer to our article “Don’t Wait for a Bear“).

So how can you prepare yourself for a price drop? How do you survive a crash without suffering financial injury? One method would be simply to employ some serious perseverance. Those who remain invested for over 10 years greatly reduce their risk of serious loss; the S&P 500 has generated a profit in 93 percent of every 10-year period since 1928. Had you invested in the MSCI World between 1980 and 2015, you would not have had a negative return over an investment period of at least 14 years. This is because the longer you stay in the market, the more likely it is that the long-term average annual return for a given asset class will neutralise any short-term losses.

The other option would be to implement a savings plan. Those who regularly invest in the capital markets never invest only at the peak of a potential stock market bubble; instead, they spread their investment across various periods of stock market performance. A crash therefore doesn’t have the potential to hit their portfolio as dramatically as if they had been unlucky enough to have invested everything at the peak.

Dynamic risk management is an additional option, as offered by Scalable Capital. It does not eliminate the risk of loss entirely but it helps to keep the risk in your portfolio at a level that you feel comfortable with. Despite Brexit and Trump, our clients’ portfolios survived 2016 well and didn’t suffer the dramatic falls they may have done under different investment processes. Most importantly, our clients didn’t react to events and withdraw their money; they trusted us to manage the risk in their portfolios. Anyone equipped with risk management tools can sleep a little easier, and maybe even sit back and enjoy the entertainment provided by “Dr Doom” and his fellow pessimists.

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Simon Miller
UK CEO & UK CO-FOUNDER
Formerly a derivatives trader at Barclays Capital, Simon merges capital markets knowledge and business development skills with an academic background in Economics, Business and Mathematics.