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Beware big-call merchants

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by Peter Switzer

With the Greek parliament passing the austerity measures and the stock market putting on another nice rise, it seems timely for me to warn — beware big-call merchants bearing gifts of seriously scary warnings.

The Dow finished up 72.28 points, or 0.56 per cent, to wind up at 12,873.51 while the S&P 500 added 9.09 points, or 0.68 per cent, to 1351.73, which the charts guys say is around another resistance level for the index.

Since October, the US stock market is up over 20 per cent and some of that rise was based on the hope that the European Union officials along with the Greeks would cut a deal to avoid a default. But the long overdue solution to the debt mess in Greece puts the spotlight on the ‘experts’ out there who stick their necks out for big calls.

Track records

Of course they’re sometimes right and that gives them some credibility but history has shown me that they don’t have good track records. It also shows that eventually they can be right but the timing is so far out, they really should be ignored.

Take the case of University of Western Sydney economist Steve Keen, who warned that debt problems were brewing before the GFC crash of 2007. Since then his calls have been way out. Anyone in the USA who listened to Steve and ran away from stocks would have missed out on the near total comeback in valuations. Anyone who sold their house expecting a 40 per cent fall has lost out. Over a year ago, Melbourne real estate prices had risen 25 per cent!

Jeremy Grantham, the Boston fund manager, has also been on this 40 per cent fall in Aussie house prices prediction but to date has been proved wrong.

There’s a hedge fund manager called Jimmy Chanos in the US who has been predicting that China will fall over, and one day he will be right — all economies crash but he has been bagging China for around three years.

Then there were the experts who said Greece would default and those who said the euro will disappear. And don’t forget those who argued that stock prices would be down for a decade and even ours with too-high interest rates and too-high dollar are about 37 per cent off their all-time high.

History as a guide

Don’t get me wrong, you need to listen and think about big-call merchants — there is someone talking about 15,000 on the Dow by the end of 2012, which I think is rubbish — but at the end of the day you are better off relying on history as a guide.

History, such as, stocks are up around seven out of 10 years. History, such as, stocks return around 10 per cent per annum over a 10-year period. Sure you could be caught out by an odd 10-year period but that’s the price for shooting for returns over five to six per cent.

Big-call merchants are more valuable when history is backing their big calls. Before the crash of 2007, the stock market had gone through five years where returns were double-digit and in four of them the gains were over 20 per cent!

I’m still worried about the residue debt levels of the GFC but I still think we will muddle through and over a 10-year period stocks will do better than cash in the bank.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Tuesday, February 14, 2012

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