Market analysts and economic experts love to predict what the market is going to do next. They love being the ones who get quoted in news reports and invited as guest commentators on various business shows to give their lofty-sounding predictions about what stocks are going to do next.
They look professional, sound professional and have professional credentials. And so they’re taken as professionals, with their every word all but good as a gold mine.
Problem is they’re more often wrong than they are right.
Think about it… How many times did you read the words “worse than expected” in a CNBC, CNN Money, Forbes, Wall Street Journal or New York Times report ever since the economy first tanked in 2008?
If you were paying any attention at all, it was a lot. Practically every week – and certainly several times a month – the headlines would be plastered with news of unexpected drops or gains (though mostly drops, it seemed) in one sector or another.
Looking at all of their bad calls – one after another after another – it quickly becomes obvious that the men and women who call themselves “experts” are actually badly out of their league.
Just a few of the many examples of predictions gone wrong last year:
Heck, on Wednesday, June 22, 2011, even Federal Reserve Chairman Ben Bernanke – who is paid the big bucks to know this kind of thing – had to confess: “We don’t have a precise read on why this slower pace of growth is persisting,” adding that problems pertaining to the housing and financial markets were “more persistent than we thought.”
The Market Experts Do Just as Badly as the Economists
So-called experts boasting in their knowledge of the stock market didn’t do much better, as evidenced by a CNN report at the very beginning of last year. On January 4, the first official trading day of 2011, the news site had this to say:
“Stocks have had a great run since bottoming out nearly two years ago, and Wall Street experts anticipate 2011 to be no different. Investment strategists and money managers expect the S&P 500 to rise 11%, on average, according to an exclusive CNNMoney survey. In fact, not one of the 32 experts surveyed by CNNMoney think the S&P 500 will decline this year.
“‘Everything seems to be in place for the stock market to rise,’ said Weeden & Co. market strategist Steven Goldman, whose 12-month target for the S&P 500 fell right in line with consensus estimates of 1,390. ‘We still have decent earnings growth and stimulative policies from the government that will help stocks keep up their performance.’”
And for a while, those 32 “experts,” seemed like they were onto something…
On January 4, 2011, the S&P started out at 1270, already up nicely from its 2010 low of 1,022. And it kept climbing well into February, peaking at 1,343.
After that, it plunged nearly a hundred points down to 1,256, but recovered quite nicely from there, hitting a new yearly high of 1,361 in early May. Then, for the rest of the month, it hit several rough spots, wavering dramatically between price levels but ultimately heading downward very close to its previous low towards the end of June.
Yet the very next month, it seemed to justify all of the experts’ opinions once again, shooting right back up. Many people even thought it was going to hit a new yearly high from there.
Instead, it finished off the rough head-and-shoulders pattern it had begun back in August 11… and fell all the way down to 1,172 before starting a nauseating series of dips and rises over the next few months.
By the end of the year, it had recovered most of what it had lost. But it was still down 13 points when 2011 came to an official end.
Once again, the experts turned out to be wrong. Very, very wrong.
The Truth about the Markets
The truth is that nobody can predict what the market is going to do. And anybody who tells you otherwise is lying or sorely mis-educated. If they were honest or realistic, they’d have to up and admit that the markets can be completely irrational – and therefore unpredictable – at times. They don’t always go up when they’re supposed to head higher and don’t always go down when the economic news looks grim.
There are far too many factors involved in every market move – political, geographical, national, international, sector-related, business-related, investor-related, etc. – to make such large predictions, no matter how confidently they are made.
Alexander Green, Investment Director for The Oxford Club and Editor of The Momentum Alert, The Insider Alert and The New Frontier Trader, wrote an article for Investment U in January, describing a conversation he had with a friend of his.
Basically, the friend was having a difficult time with his investments, which were going nowhere in both the short-term and over a longer period of time. Several years back, his broker had him heavily invested in stocks, which – as everyone knows now – was not a good place to be. And after the market crash in 2008, his broker switched tactics completely and put most of Alex’s friend’s money into safer investment plays that promised not to lose a lot… but also wouldn’t make much.
Of course, that was when the market soared.
“I just can’t seem to win for losing,” the friend complained. So Alex clued him in that he had a bad broker giving bad advice, “not because his broker failed to outguess the market… but because he’s guessing at all.”
He went on to write how “It still astonishes me that the vast majority of investors – even ones who have been active for decades – still don’t understand that stock market success has nothing to do with figuring out the economy.
“Look back at history. There’s no correlation between economic growth and stock market performance from year to year. Equities routinely plunge during the good times and rally during the bad. If you know this – and truly understand it – why would you invest your money based on someone’s economic forecast?”
The same goes for market timing, he also shares, pointing out how much easier it is to look backwards and analyze rather than forwards and predict.
That’s a large part of the reason why Marc Lichtenfeld, Editor of The Oxford Systems Trader tends to do so well in the markets. He doesn’t let the prevailing opinion get in his way when looking at an investment.
Instead, he carefully analyzes each one that crosses his radar, taking his cues by looking at fundamentals and the bigger picture over the single or less important factors that tend to catch the “experts’” eyes more often than not.
As his Investment U bio says, “Marc also looked at the market with a journalist’s skeptical eye as a columnist for The Street, where he broke several stories on companies in the biotech sector. His contrarian recommendations (including shorts) gained 12.6% annualized versus the S&P 500’s gain of 0.5%.
How to “Predict” the Markets
There is no way to predict what the market is going to do next. But that doesn’t mean there isn’t a way to make money off of it.
People who buy up individual stocks or markets have a tendency to do better than those who try to predict what the entire economy is going to do. Admittedly, looking at fundamentals instead of listening to a bunch of know-nothing (or, at best, know little) talking heads does require a bit more work.
It requires spending time looking at an investment candidate’s fundamentals. What is its price-to-earnings ratio? This number can be easily figured out by dividing a business’ going share price by its earnings per share (usually determined by the last four quarters’ average).
If the resulting amount is high, that’s oftentimes a good sign, as it indicates that current investors expect better results going forward. Though, a word of caution on that subject: Just because the number seems high doesn’t automatically mean that it is. Different industries have different averages, which should be considered as well.
And that’s only one of the many areas of interest a diligent investor could and/or should look into. A few other relevant questions include:
How has it performed in the past? Are insiders excited about it? Does it offer goods or services that consumers actually want? How does it do at putting its name out there to the public? Does it offer any additional incentives like dividends? If so, what kind of track record does it have concerning investor payouts? What news has come out concerning the company in the last year or so?
There are easier ways to do all of that and there are more difficult ways. The aforementioned Marc Lichtenfeld, for example, uses what he calls S.T.A.R.S. (Stock Trading Analytical Research System), a computer-based program that sorts through “the billions and billions of variables involved in stock market prices each day,” alerting him and his subscribers “to stocks that we would have never expected to rise.”
But individual investors can make healthy returns on their investments by sitting down and crunching the numbers themselves. It takes time and dedication – and, as with S.T.A.R.S. or any other method of crunching the numbers, it isn’t completely foolproof either – but most investments will indicate whether they’re worthwhile or not if a person is just willing to dig into it a bit.
An Investment U Classic:
Nine Invaluable Resources for Every Investor
by Marc Lichtenfeld, Investment U Senior Analyst
Wednesday, July 27, 2011: Issue #1565
[With Senior Analyst Marc Lichtenfeld traveling this week, Investment U is running an update to a classic article by the author in his usual weekly space. The original was published on August 21, 2009.]
Heaven help me… Mrs. L is on a mission.
My house has been turned upside down, as she prepares to redecorate several rooms. Fortunately for the household, my input is neither required, nor requested.
Undeterred by the recession, the missus has made Pottery Barn her second home. And look for Williams-Sonoma’s (NYSE: WSM) earnings to cruise higher next quarter, thanks to her spending there.
Trouble is, when I return home from work, the items I expect to find in their regular spots are gone, replaced by new stuff.
Yesterday, I found my books lined up in the hallway and was asked to donate the ones I don’t want anymore. However, a good chunk of my library consists of investing books, which I like to consult from time to time.
I’m often asked for recommended investment books, and as I transferred the books from the floor to the new bookshelf (excuse me, escritoire), I revisited some of my favorite titles. Here are the ones that I’ve found most valuable in my career…
Let These Authors Propel You Toward Greater Investment Success
Make some room on the bookshelf – because you’ll want to add these investment books to it if you want to increase your chances of investing success…
BONUS: One more great book just to make our list round out to ten…
You have my list… so what are some of your favorites? Leave your comments below… I still have space in the escritoire.
[Editor’s Note: Laissez Fair Books has offered an exclusive discount to Investment U readers on three titles listed above: One Up on Wall Street, The Secret of Shelter Island, and Beyond Wealth: A Road Map to a Rich Life. Order today and receive 20 percent off any these of three great books. Just use promo code P401M700.]
by Marc Lichtenfeld, Senior Analyst, Investment U
Wednesday, June 22, 2011: Issue #1540
While most investors are focused on precious metals, I prefer to look for investment opportunities in markets less traveled.
Sure, precious metals are still wildly popular – or not popular enough – depending on who you ask. And they’re always in the mainstream consciousness. Either the dollar is going to be worthless and gold and silver will be the only true stores of value, or precious metals are in a bubble and will correct to more reasonable levels. Again, it depends who you ask.
But there’s another type of metal that I have my eye on. It’s one that hasn’t enjoyed the kind of run-up that gold and silver had recently.
Steel, and the companies that make the industrial metal, have been sinking like a piece of iron in a swimming pool. And this decline is likely to continue, here’s why…
Steel Industry Faces Weakening Demand and Price Erosion
Last week, Steel Dynamics (Nasdaq: STLD) tanked after issuing an earnings warning. The company said second-quarter earnings per share would be $0.35 to $0.40 rather than the $0.57 Wall Street was expecting. The lower-than-expected guidance was due to a slump in orders in April and increasing costs.
Should the recovery falter, it’ll be particularly painful for steel companies, as construction is a bellwether of economic activity, particularly new homes.
And the folks who are buying steel are losing their optimism. The Steel Market Update’s Steel Buyer’s Sentiment Index, while still positive, is at its lowest level of the year due to concerns about price erosion and weakening demand.
“Even those involved in segments of the steel industry which have been doing relatively well since the beginning of the year – such as automotive – were displaying signs of concern about lack of strength in the overall U.S. economy,” said John Packard, Publisher of The Steel Market Update.
Responses from the survey included:
Citigroup Expecting Steel Industry to Have Negative EVA
And Citigroup is not a big fan of the sector, expecting steel companies to have negative EVA (economic value added) in 2011 through 2013. EVA is a measure of profitability over cost of capital. Citi expects aluminum and uranium companies to also have negative EVA during that period.
The weakening of the entire steel sector is analogous to the following chart of Market Vectors Steel Index ETF (NYSE: SLX)…
Allegheny Technologies: A Vulnerable Steel Company
One steel company that I think looks particularly vulnerable is Allegheny Technologies (NYSE: ATI).
However, those robust assumptions are baked into the share price. Allegheny’s stock jumped yesterday on the news. Any slowdown in orders from those customers would have a profound effect on Allegheny’s top and bottom lines.
And with the budget deficit a political football, I wouldn’t be surprised to see some defense funds cut, particularly for things like new expensive planes.
When Allegheny popped yesterday on the news, it rose above a key resistance level. If it drops back below $60, it looks like a great shorting opportunity, or a spot for longs to cut their losses.
I think Allegheny has risk to $49, which would put it more in line with its peers on a price-to-earnings basis.