John Mauldin: The Man Who Cries Wolf

April 14, 2010 at 1:46 am 24 comments


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.”

Outcome: ????

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. 

www.Sidoxia.com

*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct positions in any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

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24 Comments Add your own

  • […] John Mauldin: The Man Who Cries Wolf « Investing Caffeine […]

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  • 2. Hot Links: Epic Hair Splitting The Reformed Broker  |  April 14, 2010 at 4:22 am

    […] Wade Slome takes on John Mauldin in "The Man Who Cries Wolf".  (InvestingCaffeine) […]

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  • 3. Wednesday links: irrational equanimity Abnormal Returns  |  April 14, 2010 at 9:49 am

    […] a look at John Mauldin’s track record.  (Investing Caffeine via […]

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  • 4. Todd Tresidder  |  April 14, 2010 at 4:31 pm

    I also enjoy Mauldin’s writings as thoughtful and insightful, but forecasting the market with sufficient accuracy to profitably put money at risk is another thing entirely. Your readers might find a piece I wrote examining the fallacy of market forecasting worth a few minutes of reading time. It is congruent with your analysis above and provides more supporting data.

    Reply
  • 5. Dave Pinsen  |  April 15, 2010 at 2:00 am

    “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.

    That the cyclical bull market that started in late 2002 continued until late 2007 didn’t contradict Mauldin’s observation about being in a secular bear market. Secular bear markets contain cyclical bull and bear markets. In fact, it looks like Mauldin (and John Hussman, and Vitaliy Katsenelson) were right about us being in a secular bear market (though Katsenelson uses the term secular “range-bound” market). My issue with them isn’t with their diagnoses but their prescriptions.

    Reply
  • 6. Todd Tresidder  |  April 15, 2010 at 12:13 pm

    I subscribe to Mauldin and enjoy his insights for “broad picture” perspective; however, there is an important disconnect between profitable investing and forecasting the future which is poorly understood by most investors. Mauldin is a forecaster, but that doesn’t necessarily mean one should risk money on those forecasts.

    Money grows based on the mathematical expectation (a function of percent profitable trades and average win/average loss statistics) and the problem with forecasting is there is no mathematical expectation to the process. It is really just gambling.

    I have written two detailed articles on my site that expand on the key differences between forecasting and profitable investing that I link to here because the subject is too involved for just a blog comment. The other is not linked here but is under the title “Gambling Vs. Investing”.

    Hopefully these articles will help interested readers expand on this important subject you have brought to their attention and find actionable distinctions to protect their portfolios…

    Reply
    • 7. Dave Pinsen  |  April 15, 2010 at 3:02 pm

      Todd,

      My point wasn’t about Maudlin’s forecasting ability, but about his (accurate, I believe) observation that we are in a secular bear market. Understanding that and forecasting when the next cyclical bear market will start are two different things. Perhaps he should stop trying to forecast that. Acknowledging that we are in a secular bear market has actionable implications, even if you don’t know when the next cyclical bear market correction is coming.

      Take a couple of minutes to click through the slides in Vitaliy Katsenelson’s presentation of his secular range-bound market thesis. See also John Hussman’s weekly market commentary from Monday. Here’s the relevant excerpt:

      If you look at the performance of the stock market on a long-term historical basis, you’ll observe that there are alternating periods of “secular” bull and bear trends, which are essentially driven by long transitions between unusually high valuation multiples and unusually low valuation multiples. “Secular” bear markets (which have generally lasted 17-18 years in U.S. data) are periods where the market begins from a very rich level of valuations, and then experiences several individual bull-bear cycles, but where each successive bear market typically achieves a lower level of valuation (though not necessarily a lower absolute price trough, if earnings and other fundamentals grow). Overall, the market provides little durable return over the full period. The last secular bear market period ran from the valuation peak of the mid-1960’s to the valuation trough of 1982 – essentially a 17 year period. The last secular bull market ran from 1982 to 2000.

      I suspect that the secular bear market that began at the valuation peak of 2000 is incomplete. As of last week, the S&P 500 remained strenuously overvalued on the basis of normalized fundamentals. From that perspective, even if the trough we observed in March 2009 was the ultimate price low of the secular bear market since 2000, it’s not likely to represent the ultimate valuation trough. Given the current state of valuations, and the likelihood of several years of additional credit deleveraging, it seems that economic conditions, valuations, and the typical duration of secular bear markets converge on the likelihood of several more years of interesting but unrewarding market volatility. Secular bull market periods tend to begin with quite low multiples to normalized earnings (historically, on the order of 7), which is what provides the platform for a very long period of subsequent gains. It would not be surprising to observe a sequence of cyclical movements comprising a bear-bull-bear series, ending with a final and uncomfortable valuation trough (perhaps 6-8 years from now) before the market is finally priced to deliver that sort of sustained “secular” period of long-term gains. Current valuations provide no such platform.

      Again, I don’t entirely agree with Katsenelson’s and Hussman’s prescriptions, but I do agree with their diagnosis. Do you?

      Reply
  • […] But is he just the man who cries wolf? […]

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  • […] But is he just the man who cries Bear? […]

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  • 10. Todd Tresidder  |  April 16, 2010 at 7:12 am

    @Dave – It is all a question of time-frame and risk management.

    Valuation models are completely statistically valid; however, it is important to note that they operate on a time frame of 7-15 years to express that validity. A lot of noise can exist in time-frames less than that where an overvalued – overextended market can continue for far longer than expected. Valuation will ultimately prevail but the noise value is relevant because of the volatility impact on compounded returns.

    It is nothing more than the classic battle between the iconic characters of Mr. Market and Mr. Value as expressed by Graham, Loeb and so many others in the last 100 years. The thing too many people miss is that Mr. Market can cause significant price moves of 20-50% against Mr. Value. Volatility of that magnitude simply can’t be ignored due to the math of compounded returns.

    That is the essence of the difference between forecasting and being a real money manager. A real money manager must work with this volatility (like Hussman – who I invest with and deeply respect) because it shows up in their track record versus a forecaster (like Mauldin – who I read weekly and deeply respect but don’t invest based on his advice) where errors of large magnitude due to volatility do not show up in a managed track record.

    Hope that clarifies…

    Reply
  • 11. Todd Tresidder  |  April 16, 2010 at 7:37 am

    I re-read my last comment and want to state the issue more succinctly…

    Forecasting the market and providing an adequate risk adjusted return based on those forecasts are two entirely different beasts.

    The only one that matters is the risk adjusted return.

    Reply
    • 12. Dave Pinsen  |  April 16, 2010 at 9:23 am

      Todd,

      Yes, managing money and publishing a newsletter containing market commentary are entirely two different things. Agreed. But you are eliding the point I’ve made a couple of times here already:

      This comment by Mauldin,

      “And not to put too fine a point on it, I still think we are in a long term secular bear market.”

      Was not refuted by this comment by you,

      “Reality: S&P 500 up +5% for the year and up a few more years after that.”

      Because your “Reality” comment there did not acknowledge the difference between a secular bear market and a cyclical one. Your follow up comment about valuation models, extended markets etc., suggests you might benefit from reading Katsenelson’s thesis. I tried to include a hyperlink to Katsenelson’s slide show last time, but didn’t realize until I posted the comment that you don’t allow anchor tags here. So here is the address without the tags: ( http://contrarianedge.com/wp-content/uploads/2009/08/avi-presentation.pdf ).

      In a nutshell, the point of Katsenelson’s thesis is not that there is some Platonic (or Grahamian) ideal earnings multiple below which stocks are attractively valued, and that one should only buy stocks there, but that multiples expand over the course of secular bull markets, and contract over the course of secular bear markets (which he calls secular “range-bound” markets), which tend to last as long as the secular bulls that preceded them.

      The idea that we are in a secular bear market that will likely last about as long as the preceding secular bull market (which lasted from 1982-2000) — and that it won’t end until stocks are trading at a historically low earnings multiple — is one shared by Hussman, Mauldin, and Jim Rogers, in addition to Katsenelson. This has actionable implications for the three of them who manage money. For Hussman, it prompts his hedging; for Katsenelson, it prompts his “active value investing” method; for Rogers, it prompts his investment in commodities, which he believes enjoy secular bull markets when stocks are in secular bear markets.

      Reply
      • 13. Todd Tresidder  |  April 16, 2010 at 11:09 am

        Dave – I think you are confusing the author of this post with me – who is a reader just like you. You are quoting the author and attributing that quote to me incorrectly.

        In fact, if you look at my comments you and I have no disagreement except maybe in semantics.

        I happen to agree with the forecasts put forth by all the well reasoned and high quality writers you cited, yet I am only invested with one (Hussman) because I believe he has adequately bridged the gap between the intellectual world of forecasting models and the brass-tacks reality of producing a favorable risk-adjusted return over the long-term. In fact, his own writings frequently make that distinction as well.

        Mauldin’s publishing business, however, is based on forecasting. It is interesting to note that Mauldin’s money management business is not based on his newsletter published forecasts. That is an important distinction supporting my thesis.

        Again, I make this point with the deepest respect because I enjoy and respect Mauldin’s work and read him every week: I can only hope my publishing business reaches a fraction of the success he has seen.

        However, with that said it is important to realize that forecasting the future and managing money to a favorable risk/reward ratio are different disciplines and should not be collapsed together. That is the only point I’m trying to make, and it is supported by the actions and/or writings of both these highly credible experts.

        Again, I’m not the author of this post. Just a reader like you who had a thought to add to the discussion…

  • 14. Dave Pinsen  |  April 16, 2010 at 11:32 am

    Sorry Todd, you’re right: I did confuse you with the author of the post. I’m not a regular reader of this blog — just followed a link from Twitter — and when you responded to my initial comment, I thought you were the blogger.

    I do think you should click on the Katsenelson presentation, if you haven’t already. The difference between what I’ve written here and what you’ve written may appear subtle at first, but it’s not just semantics. It has actionable implications, as I mentioned above. Consider the case of Hussman’s hedging. Conventional wisdom often says that hedging is a drag on returns over the long-term, because of its cost. That’s probably true during secular bull markets, but not during secular bear markets.

    It’s been good corresponding with you in any case.

    Reply
  • 15. Monevator  |  June 13, 2010 at 8:25 am

    The clue is that we all admire Maudlin’s writing and all think his predictions are fairly worthless. He’s running a newsletter business, not a fund.

    With my blog, I have been repeatedly dismayed how clever sounding bearish bloggers pull in the crowds over sober uncertainty.

    I’d say that like with investing it’s long term outcomes that count, except Maudlin seems to prove the opposite!

    Good job on keeping him honest.

    Reply
  • […] earnings forecasts. With that said, I do have problems  with those bears like John Mauldin (read The Man Who Cries Wolf)  who just last year pointed to a market trading at a “(negative)  -467” P/E ratio, only to […]

    Reply
  • 17. Weekend reading  |  June 26, 2010 at 3:58 am

    […] blog would be more popular if I wrote about buying gold three times a week and screamed the sky is falling. That’s what does well on the web. But the whole point of Monevator is it’s a place for […]

    Reply
  • […] when listening to economists and strategists like Peter Schiff, Nouriel Roubini, Meredith Whitney, John Mauldin, et.al. Typically, these financial astrologists weave together convincing, elaborate, grand guesses […]

    Reply
  • 19. BT  |  December 20, 2010 at 8:13 pm

    Well written

    Reply
    • 20. sidoxia  |  December 20, 2010 at 8:16 pm

      Thanks BT (Maverick81)…appreciate it.

      ~WS

      Reply
  • 21. Top 10 of 2010 « Investing Caffeine  |  January 7, 2011 at 1:00 am

    […] John Mauldin: The Man Who Cries Wolf […]

    Reply
  • 22. Alex  |  January 16, 2012 at 11:34 am

    Well done assessment. Keep up the good work.

    Reply
  • 23. The Central Bank Dog Ate My Homework | Investing Caffeine  |  April 14, 2013 at 11:11 pm

    […] been a painful four years for the bears, including Peter Schiff, Nouriel Roubini, John Mauldin, Jimmy Rogers, and let’s not forget David Rosenberg, among others. Rosenberg was recently on CNBC […]

    Reply
  • 24. L  |  November 27, 2013 at 7:29 am

    Could you please write a follow-up to this article. John Mauldin is a tool that has probably lost people more money with his wrong advice than Bernie Madoff ever stole.

    Reply

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