Fear Sells. Don't Buy It.

I have a close relative that is debating taking a new job.  The new position would be more favorable from a tax standpoint, commute time, and life balance, although, it would be sensitive to economic cycles.  An objective human being would call it a “no brainer.”  However, he had just read an economic report that predicted a crash worse than the financial crisis of 2008 was on the horizon.  If he took the job and the economy tanked, it would likely mean unemployment.  When I saw the source of the report, I almost fell out of my chair.


Here’s the deal.  The habitual predictors of doom and gloom have an agenda.  If you look closely enough, the “advice” spewed from their corner likely results in monetary benefit for themselves.  They want you to subscribe to their newsletter for a nominal fee, buy their book, and download their free report (which leads to you being bombarded with solicitations to purchase something).  Think about it, if these economic savants had been trading on their own advice (betting against an equity market rise), they would have been broke long ago. 


Let’s look at the track record of some of the biggest pessimists that the media has the audacity to give a microphone to.  The below quotes are just a sampling of catastrophe predictions.  I have included links that detail a more holistic view of our bearish friends:


Albert Edwards, Societe Generale“I will repeat that: If I am right, the S&P would fall to 550, a 75% decline from the recent 2100 peak. That obviously will be a catastrophe for the economy via the wealth effect and all the Fed’s QE hard work will turn to dust.”January 2016(Edwards).


Jim Rogers, Co-Founded Quantum Fund- “A $68 trillion ‘Biblical’ collapse is poised to wipe out millions of Americans.”May 2016(Rogers).


Marc Faber, Editor of Gloom, Boom & Doom Report- "My sense is that at the present time, the US market is relatively expensive compared to foreign markets, especially to European markets and to emerging markets. On a cyclically-adjusted P/E [price-to-earnings] basis, it is actually going to return very little over the next seven to 10 years.” – December 2013(Faber).


Lessons:


  • Don’t let those that have been wrong every year tell you what happens next.  Recessions and stock market declines are part of investing. 

  • Consider the underlying agenda of the source.  Spectacular predictions are often lures to promote their brand, sell subscriptions and books, and increase website traffic (leading to advertising revenue opportunities).  There is no penalty for being wrong every year, but the potential notoriety for being correct could be lucrative.

  • Investors should be equally skeptical of perma-optimists (something I refer to as the Wall Street bias). 

  • Careful about searching for information to confirm your bias.  For example, those who believe we are headed for a market crash will seek out content that validates their extreme viewpoint.   

  • Making drastic allocation changes due to emotion is a two-part decision; sell (easy) & getting fully reinvested at the optimal time (very difficult).  Investors get the latter wrong almost every time.

  • Learn how to separate nonsense from useful information.  This is a very useful skill for an investor to have.  A good question to ask yourself is where do I get my news?  Am I compelled to do something after reading a spectacular headline.

People hate losses much more than they enjoy gains.  Therefore, fear mongering headlines will always have an audience.  Every year since the great recession ended, I have had clients tell me that the market is overvalued and due for a correction.  Thankfully for them, we didn’t make any large deviations from their asset allocation. 


A big part of our job as professional investors is filtering relevant information from noise.  Given the explosion of communication platforms (Twitter, Facebook, LinkedIn, etc.), this skill is more important than ever.  Don’t let the bombardment of noise influence important life decisions or a solid investment program.

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