A Review of January Predictions

In the ongoing debate about the market, investors often have a fixation about recent performance.  What is the right question to ask?  Asking "How are you doing this year?" or "How did you do last year?" seems intelligent, logical, and safe, but it is quite unhelpful.

The right questions — those exploring the actual method and longer-term results — are more difficult to frame and to ask.

The Current Debate

Doug Kass says we have hit the high for the year.  Since he was accurate at the March low, many people will follow him without further thought.  In fact, two-thirds of RealMoney readers agreed in their poll.  Most of them, and most of the writers on that site, were already bearish.  Many are geared to "sell the rips," so they have been out of step with the market for far too long.  From this perspective, the big rally has gone too far.

Other observers think that we are only starting a new bull market — 40% undervalued, by some accounts.  From this perspective (closer to our own viewpoint) the starting point was far too low.  Conditions have improved, and so should our earnings forecasts.

In future articles we hope to review the wide range of current forecasts and varying valuation methods.  For now, let us focus on our results.

Predictions for 2009

In January we accepted a request from SeekingAlpha, where we contribute nearly all of our work, for an exclusive preview of 2009.  With their permission, we re-ran the article on "A Dash."

We made a number of predictions, with the pre-Lehman period as a crucial benchmark.

You can make a big return even without an
economic boom. Stocks will start to react when it becomes clear that a
depression is “off the table.” That gets us to the initial target of
Dow 11,000. That is over 20% for the market, and even more in our
basket of stocks. It may take a few months, but we can then reassess
the economic prognosis.

We urge readers to review our reasoning, which still sounds pretty good.

We continue to view Dow 11,000 as a good initial target for the market.  That is a benchmark for "no depression."  Many stocks are still lagging.

We recognized that many investors were frightened, and encouraged them to invest in something–anything! We recommended corporate bonds for the most conservative.  That was a big winner, especially for those who chose debt instruments from the financial sector.  That was a double in a few months.

We recommended four specific stocks, something you do not usually see.  We violated the old rule of forecasts:  Never give a time frame and a price in the same prediction!

So what happened if you bought our four stocks on the first business day after we ran the article on "A Dash?"  They were all winners by 20% or more, despite the early-year selling.  The average gain is 56%.  An investor who put 1/3 into a stock portfolio, as we suggested in the article, would be doing nicely on the year.

Obviously, that is not our long-term return.  There have been three market crises in our management history. We were wrong last year, great in 2000, and OK in 1998.  In the long run, we have beaten our S&P 500 benchmark very nicely for over ten years.

There are regulations on sharing performance information.  The investor needs to ask.  Start asking!  Many of those featured as "calling the crash" did not make any money from their predictions. 

Few Takers?

We understand that few investors followed our January advice, mostly for psychological reasons.  It is so hard when everything seems to be going wrong.  Meanwhile, the wise and experienced advisors who followed this course last October (like Warren Buffett) were all losers.

The individual investor now has a new challenge.  The market has rallied.  Is it too late?

The most short-sighted investors think that last September was some defining moment that determined who was smart and who was dumb.  This group, chasing performance, will be the biggest losers in the years ahead.

Full Disclosure — We still hold all of the mentioned stocks in individual and client accounts, although we have done a little selling in AAPL.  We have new ideas and new themes, sharing some with those who asked for our free mid-year update.

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  • pslider@hotmail.com August 28, 2009  

    What is your take on the current Federal Reserve transparency issue?

  • Jeff Miller August 30, 2009  

    pslider — My mission here is writing about investments, so let me answer first from that perspective. I do not think that the current issue and court case are relevant to our investment decisions, at least not within a time frame of one year or less.
    As a citizen and a former poli sci prof, I am quite interested in the question. I confess to a very strong bias in favor of open government, dating back at least to the Pentagon Papers. We could also use more of it in Illinois!
    With this in mind, I note that most of my investment blogging colleagues only state one side of the case. I do see the other side. Our financial institutions are vulnerable to a quick change in psychology. If we start having a run on the major banks, our societal problem is much worse.
    This is not an open and shut case. It will wind its way through the appeal process, as have many other issues of visibility and freedom of the press.
    The Fed has much more transparency than in the past, but perhaps it needs more.
    Sometimes I wish I had an “opinion” blog. It might be more fun!
    Thanks for the question.

  • pslider@hotmail.com September 1, 2009  

    Thank you!

  • MikeInMN September 1, 2009  

    In this article you wrote:
    “Meanwhile, the wise and experienced advisors who followed this course last October (like Warren Buffett) were all losers.”
    This sounds like you think WEB was a “loser” over the last several months.
    Am I reading this wrong?
    If not, please explain.

  • Jeff Miller September 1, 2009  

    Nick — I meant that WEB and other leading advisors have learned over many years to step up in times of fear. For several months, at least through early March, that did not work. Much of the punditry decided that these experts had “lost it.”
    I trust that Mr. Buffett has done very well in the rebound, and I value his advice as much as always.
    Thanks for helping me to clarify this.

  • MikeInMN September 1, 2009  

    Much of the punditry decided that these experts had “lost it.”
    Indeed. In fact, IIRC, Doug Kass (mentioned earlier in the article) was one of the punditry that was suggesting BRK was a sinking ship because of WEB’s derivative positions.
    Not so much.