John Mauldin: The Man Who Cries Wolf
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We have all heard about the famous Aesop fable about The Boy Who Cried Wolf. In that story, a little boy amuses himself by tricking others into falsely believing a wolf is attacking his flock of sheep. After running to the boy’s rescue multiple times, the villagers became desensitized to the boy’s cries for help. The boy’s pleas ultimately get completely ignored by the villagers despite an eventual real wolf attack that kills the boy’s flock of sheep.
Mauldin: The Man Who Cries Bear
John Mauldin, former print shop professional and current perma-bear investment strategist, unfortunately seems to have taken a page from Aesop’s book by consistently crying for a market collapse. After spending many years wrongly forecasting a bear market, his dependable pessimism eventually paid dividends in 2008. Unfortunately for him, rather than reverse his downbeat outlook, he stepped on the pessimism pedal just as the equity markets have exploded upwards more than +80% from the March lows of last year. Mauldin is widely followed in part to his thoughtful pieces and intriguing contributing writers, but as some behavioral finance students have recognized, being bearish or cautious on the markets always sounds smarter than being bullish. I’m not so sure how smart Mauldin will sound if he’s wrong on the direction of the next 80% move?
The Challenged Predictor
I find it interesting that a man who freely admits to his challenged prediction capabilities continues to make bold assertive forecasts. Mauldin freely confesses in his writings about his inability to manage money and make correct market forecasts, but that hasn’t slowed down the pessimism express. Just two years ago as the financial crisis was unfolding, Mauldin admits to his poor fortune telling skills with regards to his annual forecast report each January:
“ I was wrong (as usual) about the stock markets.”
Here’s Mauldin explaining why he decided to switch from investing real money to the simulated version of investment strategy and economic analysis:
“I wanted to begin to manage money on my own… I found out as much about myself as I did about market timing. What I found out was that I did not have the emotional personality (the stomach?) to directly time the markets with someone else’s money… I simply worried too much over each move of the tape.”
Apparently timing the market is not so simple? Readers of Investing Caffeine understand my feelings about market timing (read Market Timing Treadmill piece) – it’s a waste of time. Market followers are much better off listening to investors who have successfully navigated a wide variety of market cycles (see Investing Caffeine Profiles), rather than strategists who are constantly changing positions like a flag in the wind. I wonder why you never hear Warren Buffett ever make a market prediction or throw out a price target on the Dow Jones or S&P 500 indexes? Maybe buying good businesses or investments at good prices, and owning them for longer than a nanosecond is a strategy that can actually work? Sure seems to work for him over the last few years.
When You’re Wrong
Typically a strategist utilizes two approaches when they are wrong:
1) Convert to Current Consensus: Most strategists change their opinion to match the current consensus thinking. Or as Mauldin described last year, “I expect that this year will bring a few surprises that will cause me to change my opinions yet again. When the facts change, I will try and change with them.” The only problem is…the facts change every day (see also Nouriel Roubini).
2) Push Prediction Out: The other technique is to ignore the forecasting mistake and merely push out the timing (see also Peter Schiff). A simple example would be of Mr. Mauldin extending his recession prediction made last April, “We are going to pay for that with a likely dip back into a recession in 2010,” to his current view made a few weeks ago, “I put the odds of a double-dip recession in 2011 at better than 50-50.”
More Mauldin Mistake Magic
Well maybe I’m just being overly critical, or distorting the facts? Let’s take a look at some excerpts from Mauldin’s writings:
A. January 10, 2009 (S&P @ 890):
Prediction: “I now think we will be in recession through at least 2009 before we begin a recovery….We could see a tradable rally in the next few months, but at the very least test the lows this summer, if not set new lows….It takes a lot of buying to make a bull market. It only takes an absence of buying to make a bear market.”
Outcome: S&P 500 today at 1,179, up +32%. Oops, maybe the timing of his recovery forecast was a little off?
B. February 14, 2009 (S&P @ 827):
Prediction/Advice: “Let me reiterate my continued warning: this is not a market you want to buy and hold from today’s level. This is just far too precarious an economic and earnings environment.”
Outcome: S&P 500 up +45%. You pay a cherry price for certainty and consensus.
C. April 10, 2009 (S&P @ 856):
Prediction: “All in all, the next few years are going to be a very difficult environment for corporate earnings. To think we are headed back to the halcyon years of 2004-06 is not very realistic. And if you expect a major bull market to develop in this climate, you are not paying attention.” On the economy he adds, “We are going to pay for that with a likely dip back into a recession in 2010.”
Outcome: S&P 500 up +38%, with the economy currently in recovery. Interestingly, his comments on corporate earnings in February 2009 referenced an estimate of $55 in S&P 2010. Now that we are 14 months closer to the end of 2010, not only is the consensus estimate much firmer, but the 2010 S&P estimate presently stands at approximately $75 today, about +36% higher than Mauldin was anticipating last year.
D. May 2, 2009 (S&P @ 878):
Prediction: “This rally has all the earmarks of a major short squeeze. ..When the short squeeze is over, the buying will stop and the market will drop. Remember, it takes buying and lot of it to move a market up but only a lack of buying to create a bear market.”
Outcome: S&P 500 up +36%.
Now that we have entered a new year and experienced an +80% move in the market, certainly Mauldin must feel a little more comfortable about the current environment? Apparently not.
E. April 2, 2010 (S&P @ 1178):
Prediction: “ I think it is very possible we’ll see another lost decade for stocks in the US. If we do have a recession next year, the world markets are likely to fall in sympathy with ours.”
Previous Mauldin Gems
Here are few more gloomy gems from Mauldin’s bearish toolbox of yester-year:
2005: “The market is a sideways to down market, with the risk to the downside as we get toward the end of the year and a possible recession on the horizon in 2006. And not to put too fine a point on it, I still think we are in a long term secular bear market.” Reality: S&P 500 up +5% for the year and up a few more years after that.
2006: “This year I think the market actually ends the year down, and by at least 10% or more during the year. Reality: S&P 500 up +14% (excluding dividends).
2007: Mauldin’s rhetoric was tamed in light of poor predictions, so rhetoric switches to a “Goldilocks recession” and a mere -10-20% range correction. He goes on to dismiss a deep bear market, “In future letters we will look at why a deep (the 40% plus that is typical in recession) stock market bear is not as likely.” Reality: S&P 500 up +5%. Looks like the writing on the wall for 2008 turned out a bit worse than he expected.
2008: Sticking to soft landing outlook Mauldin states, “I think this will be a mild recession … I don’t think we are looking at anything close to the bear market of 2000-2001.” Uggh. Ultimately, the bear market turned out to be the worst market since 1973-1974 – his prediction was just off by a few decades. Reality: S&P 500 down -37%.
Lessons Learned from Market Strategists
I certainly don’t mean to demonize John Mauldin because his writings are indeed very thoughtful, interesting and include provocative financial topics. But put in the wrong hands, his opinions (and dozens of other strategists’ views) can be extremely dangerous for the average investor trying to follow the ever-changing judgments of so-called expert strategists. To Mauldin’s credit, his writings are archived publicly for everyone to sift through – unfortunately the media and many average investors have short memories and do not take the time to hold strategists accountable for their false predictions. Although, Iike Warren Buffett, I do not make market timing predictions or forecast short-term market trends, I see no problem in strategists making bold or inaccurate forecasts, as long as they are held responsible. Every investor makes mistakes, unfortunately, strategist predictions are usually not readily available for analysis, unlike tangible investment manager performance numbers. When forecasting lightning strikes and extreme bets win, every newspaper, radio show, and media outlet has no problem of placing these soothsayers on a pedestal. Thanks to the law of large numbers and the constantly shifting markets, there will always be a few outliers making correct calls on bold predictions. Who knows, maybe Mauldin will be the next CNBC guru du jour in the future for predicting another lost decade of equity market performance (see Lost Decade article)?
Regardless of your views on the market, the next time you hear a financial strategist make a bold forecast, like John Mauldin crying wolf, I urge you to not go running with the motivation to alter your investment portfolio. I suppose the time to become frightened and drive the REAL wolf (bear market) away will occur when consistently pessimistic strategists like Mauldin turn more optimistic. Until then, tread lightly when it comes to acting on financial market forecasts and stick to listening to long-term, successful investors that have invested their own money through all types of market cycles.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
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