Posts filed under ‘Behavioral Finance’
Why it’s NOT Different This Time
“Those who don’t know history are destined to repeat it.”
– Edmund Burke – British Statesman and Philosopher (1729-1797)
I wasn’t a history major in college, but I’ve learned two things by studying history books: 1) The unchanging psyche of human nature leads history consistently to repeats itself; and 2) There is never a shortage of goofballs willing to make zany predictions.
Robert Zuccaro is no exception to lesson number two, as evidenced by his 2001 book, Why it’s Different this Time…Dow 30,000 by 2008! Sticking one’s neck out is never too difficult when you have a multi-decade trend behind your back – I guess Dow “14,000” just didn’t sound sexy enough back then. Unfortunately the herd reacting to these bold, extreme predictions eventually realize (usually post-mortem) that they are quickly approaching a tail-end of a cycle. The cab driver, hair dresser, and mechanic realized the dangers of following the “New Economy” cheerleaders in 1999 when everyone was piling into dot-com stocks (see Bubblicious technology table ).
Dow 1,000 Here We Come!
- Source: Yahoo! Finance
Today, the Zuccaros of the world have been washed to the curb, and new “Armageddon” extremists have sprouted up to the surface, like perma-bear Peter Schiff and his call for Dow 2,000 or his $5,000 per ounce gold estimate. More recently, Robert Prechter has one-upped Schiff by forecasting Dow 1,000 with the assistance of the not-so ironclad Elliott Wave Theory philosophy (see Technical Analysis: Astrology or Lob Wedge). If you’re in the Prechter camp, either crawl back into your bunker or start digging that dream cave you always wanted.
Source: Elliott Wave International
“Hey, Look Here at My Crazy Forecast!”
Publicity doesn’t necessarily rain praise on those parroting the consensus view (although the warmth of job security is appreciated), but rather the extreme outliers love to bask in the glow of media attention. The extremists consistently repeat “why it’s different this time.” What is different is the set of circumstances, but what history shows us over and over again is the emotions of fear and greed feeding the bubbles of excess are exactly the same. Whether you’re talking about the Tulip-Mania of the 1630s, the Nifty Fifty stocks of 1973-1974, the technology Four Horsemen of the mid-1990s, or the Icelandic Banks of 2008, what we learn from the lessons of history is that human nature will never change and fear and greed will continue creating and bursting future bubbles.
People playing the game long enough understand, “It’s NOT different this time.” Not only have we endured repeated wars, recessions, banking crises, currency crises, but we have also survived every exotic animal disease known to man, including Mad Cow, Swine Flu, Bird Flu, West Nile, etc.
Robert Zuccaro and Robert Prechter may get an “A” for their attention grabbing forecasts, but thus far the grade earned on accuracy is closer to an “F.” More specifically, Zuccaro’s prediction never came close to 30,000 by the end of 2008 (only off by about 21,000 points), and guess what, Bob Prechter has a long way to go before reaching his Dow 1,000 target. So here is my proposition: Why don’t we just split the difference between Zuccaro’s 2008 and Prechter’s 2016 forecasts and take the average? If it turns out they are equally bad forecasters, then Dow 15,500 by 2012 should be no problem ([30,000 + 1,000] ÷ 2)!
Regardless of the ultimate outcome of this market (double-dip or sustained recovery), what I do know is there will continue to be wacky outlandish forecasters rationalizing why a trend will go on for infinity and why “this time is different.” In reality these attention mongers will always be around ensuring this time (or next time) will never be different…just the same fear and greed as always.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
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 position in any other 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.
The Curious Case of Gen Y and Benjamin Button
If a current Gen Y-er aged backwards like Benjamin Button, he would feel right at home when it comes to investing, because acute conservatism and risk aversion have struck older and younger generations alike. The Curious Case of Benjamin Button is a story that follows the critical peaks and valleys of a boy born in his eighties, who immediately begins to reverse the aging process. Investors of all ages have suffered their peaks and valleys over the last decade, and these experiences have impacted investing attitudes and perceptions heavily during the prime earning years. For retirees, it’s virtually impossible for extreme events like the Great Depression, World War II, Vietnam, Kennedy’s assassination, and Nixon’s impeachment to NOT have had an influence on individuals’ investing behavior.
Investing Consequences on Younger Investors
If a younger Mr. Button were still alive today, there is no doubt the disheartening events experienced in his 80s would only become reinforced by the bleak occurrences in 2008-2009. His reverse aging would not only have allowed him to witness the collapse of Lehman Brothers, but also behold the demise and bailout of other gargantuan financial institutions. Today, if Benjamin wasn’t busy watching the MTV Video Music Awards, he would most likely be diligently managing his bullet-proof portfolio of cash, CDs (Certificates of Deposit), Treasury bills, and maybe some tax-free municipals if he was feeling a little spunky.
The cautious stance of youthful savers was confirmed in a recent study conducted by Merrill Lynch Global Wealth Management. The report demonstrates how the recent financial crisis has had a severe dampening impact on the risk appetites of 18-34 year old “Millennials.” So dramatic an effect was the recession, the nervous conservatism experienced by the 30-somethings was only rivaled by fear from 65 year olds. In fact, the 56% of young investors, who were more cautious today than a year ago, was the highest percentage registered by any age group.
Here’s what Christopher Geczy adjunct associate professor of finance at University of Pennsylvania’s Wharton School had to say about younger Millennials:
“We’re coming off a series of financial crises that hit this young generation at points in their lives where external events shape strong opinions…Many of them have witnessed a decline in the wealth of their families and seen their parents delay retirement or even return to the workforce.”
Beyond witnessing the challenges faced by their parents, the Millennials are encountering their own obstacles – such as joblessness. For those workers under age 35, the unemployment rate in August stood at more than 13% – significantly higher than the 9.6% national rate.
Note to Youths: Stocks for the Long Haul
In the typical life cycle of investing, investors flaunt a higher risk tolerance in their younger years and exhibit more risk aversion as they approach or enter retirement. Historically, this makes perfect sense because workers earlier in their careers have plenty of time to ride out the fluctuations associated with owning equities. Jeremy Siegel, professor at the Wharton University Professor, says stocks significantly outperform bonds by 6% per year over longer timeframes (see Siegel Digs in Heels).
For Gen Y-ers the larger risk is being too conservative, not too aggressive. Barry Nalebuff, a strategy professor at Yale’s School of Management agrees:
“The biggest risk for this generation is that they’ll live too long. With medical breakthroughs, the reality is that many of them will live beyond 100…The only way they have enough assets to last them is to invest in stocks. If they don’t, a lot of people will have to keep working way past when they want to because they won’t have enough money saved up.”
Even for those downbeat on the domestic equity markets – rightfully so with no price gains achieved over the last decade – younger investors should not lose sight of the tremendous equity opportunities available internationally (see the Blowing the Perfect Investment Game).
For many people, reverse aging may be fun for a while, but for Benjamin Button, living through the Great Depression and multiple wars as an adult would likely dampen the mood and increase risk aversion dramatically. Millennials have persevered through difficult times too. Generation Y has survived two recessionary bubbles caused by excessive technology spending and consumer credit binging, both over a short timeframe. Becoming too conservative for these investors will feel comfortable in the short-run if uncertainty continues to prevail. But investing now with adequate, diversified equity exposure is the prudent course of action. Even a wrinkly Benjamin Button could agree, wisely investing in some equities during your earlier career sure beats working as a Wal-Mart (WMT) greeter into your 80s.
Read the full Money-CNN and Newsweek articles on the subject
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and WMT, but at the time of publishing SCM had no direct position in BAC/Merrill, Lehman, or any other 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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