Want to Lose Your Money? Listen to Millionaires

Hmmm.
About
that.
What’s
more,
the
last
time
that
the
poll’s
respondents
were
so
bearish
was
in
2008,
which
gives
the
millionaires
a
perfect
record.
Whenever
they
heartily
dislike
stocks,
US
equities
promptly
gain
26%.

Problem
#1:
Recency
Bias

Admittedly,
the
survey
was
unscientific.
How
CNBC
selected
its
761
participants
from
among
the
several
million
possibilities
is
unclear,
but
given
the
questions
were
administered
online,
the
result
is
unlikely
to
pass
academic
muster.
Besides,
most
people
realise
they
cannot
predict
equity
returns.
Ask
the
question
and
they
may
respond.
However,
that
doesn’t
mean
they
truly
believe
their
answers.

Nevertheless,
the
exercise
was
revealing.
As
with
all
endeavours,
investment
predictions
are
strongly
affected
by
recency
bias.
After
a
well-publicised
plane
crash,
airline
travellers
become
warier,
with
their
fears
gradually
dissipating
along
with
the
memory
of
the
accident.

Likweise,
consumers
are
fonder
of
large
SUVs
when
gas
prices
are
depressed
than
when
they
are
spiking.
And
when
asked
about
the
stock
market’s
prospects,
retail
investors
are
gloomiest
after
bear
markets.

Problem
#2:
Group
Think

For
the
most
part,
professionals
avoid
such
errors.
Almost
all
attended
business
schools,
where
they
were
instructed
to
avoid
recency
bias.

Also,
given
the
difficulty
of
making
such
forecasts,
discretion
quickly
becomes
the
better
part
of
valour.
Their
predictions
are
therefore
much
steadier
than
the
millionaires’
outlooks.
Entering
2023,
the median
projection among
20
Wall
Street
firms
was
that
the
total
return
for
the
S&P
500
would
be
4.5% –
slightly
more
conservative
than
usual,
but
much
above
what
retail
investors
guessed.

Where
professionals
run
into
trouble
is
with
economic
forecasts.
They
are
also
expected
to
provide
those,
and
with
that
task
they
do
not
duck
the
challenge.
When
asked
in
October
2022
about
the
following
year’s
real
gross
domestic
product
growth,
Wall
Street
strategists
gave
a
median
answer
of
a
puny
0.20%.
Only
11
of
the
78
respondents
predicted
a
growth
rate
that
equalled
or
exceeded
the 50-year
annualised
average of
2.6%.
That
is
pretty
much
what
2023 will
record.

Consequently,
those
who
used
economic
predictions
to
guide
their
investments
almost
certainly
suffered
for
that
decision.
Typically,
the
arrival
of
a
recession
is
accompanied
by
bond
market
strength
and
stock
market
weakness,
albeit
with
relatively
good
showings
from
recession-resistant
equities:
consumer
staples,
healthcare,
and
utilities.
In
2023,
the
opposite
occurred.
Long
bonds
struggled
to
break
even,
while
equities
soared.
Conspicuously
absent
from
the
stock
market
rally,
however,
were
businesses
from
those
defensive
sectors.

To
some
extent,
the
economists’
fears
were
justified.
An
inverted
yield
curve
caused
by
rising
short-term
interest
rates,
as
was
the
case
entering
2023,
usually
presages
a
recession.
But
professional
economists
are
paid
to
anticipate
the
exceptions.

That
so
few
did
owes
to
the
same
reason
that
they
missed
2021’s
inflationary
spike.
Collectively,
they
had
their
eyes
on
what
others
were
saying.
Their
analyses
were
not
entirely
independent
because
of
group
think.

Problem
#3:
Wishful
Thinking

A
long-standing
joke
of
my
former
boss,
Don
Phillips,
is
that
portfolio
managers
inevitably
comment
that
the
previous
year
was
dominated
by
a
single
simple
trend.
You
will
now
hear
that
making
money
in
2023
merely
required
owning
the
“Magnificent
Seven“.
Whereas
profiting
in
2022
meant
avoiding
both
stocks
and
bonds,
because
the
Federal
Reserve
was
stifling
each
marketplace
by
increasing
interest
rates.
Buying
growth
stocks
sufficed
in
2021.
And
so
forth.

Thus,
Bank
of
America’s
investment
strategists
currently
claim
2024
will
be
a
“stock
picker’s
paradise.” Meanwhile,
BlackRock’s
chief
investment
officer
of
global
fundamental
equities
(the
company’s
active-management
group) says 2024
is
shaping
up
to
be
a

“bonanza”
for
“stock
pickers,” while Leon
Cooperman
states that
we
are
entering
a
“stock
picker’s
market.”
Toronto’s
Dennis
Mitchell claims
the
same for
the
Canadian
marketplace.

No
doubt
there
is
actual
analysis
intermixed
with
the
wishful
thinking,
but
don’t
overlook
the
powerful
influence
of
the
latter.
It
is
for
that
reason
I
routinely
discount
forecasts
of
economic
booms
from
growth-stock
managers
and
economic
busts
from
bond-fund
leaders
(case
in
point:
Bill
Gross’ downbeat
prognosis of
a
slow-growth
“new
normal”
that
would
allegedly
depress
equity
returns,
made
just
as
stocks
entered
a
huge
bull
market),
along
with
complaints
about
overpriced
stock
markets
from
those
who
run
value
funds.
In the
words of
Paul
Simon:
“a
man
hears
what
he
wants
to
hear
and
disregards
the
rest.”

Why
Should
I
Even
Bother
With
Forecasts,
Then?

It
is
at
this
point
where
I
might
be
expected
to
wag
my
electronic
finger
and
counsel
investors
to
ignore
forecasts.
That
I
will
not
do.

For
one,
the
admonition
would
be
hypocritical,
as
I
partake
too.
For
another,
if
consumed
appropriately,
investment
predictions
can
be
quite
useful.
The
key
is
to
follow
their
arguments
rather
than
their
advice.
Understanding
the
logic
behind
the
prophecy
is
an
excellent
way
of
learning
more
about
both
investments
and
the
general
economy.

When
I
studied
for
my
MBA,
I
skipped
the
macroeconomics
requirement,
although
I
had
never
taken
an
economics
course
(such
are
English
majors).
No
worries.
After
reading
several
hundred
market
forecasts,
I
had
thoroughly
learned
the
material.
Along
the
way,
I
had
also
absorbed
the
initial
lesson
of
the
university’s
investments
class:
the
difficulty
of
outguessing
efficient
markets.
How
right
that
was.

John
Rekenthaler
is
vice
president,
research,
at
Morningstar.
To
get
in
touch
with
him,
contact
john.rekenthaler@morningstar.com

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