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Saturday, April 9, 2011

April 9, 2011, Bob Brinker's Bear Market Forecasting

April 9, 2011.....The last time that Larry Swedroe made a guest-appearance on Bob Brinker's Moneytalk, he indicated that the stock market was in a bear. That was March 1, 2008, when the S&P was at 1385, DOUBLE what it was one year later. Bob Brinker disputed Swedroe's claim of a bear market on the program that day.

Swedroe doesn't put much store in gurus and forecasting. Maybe that is why he has not been on Moneytalk again.

FrankJ sent these comments earlier today:

"The seeking alpha website has an interview with Larry Swedroe on his new book.

I wonder if we'll hear him as a guest sometime? The book favors indexing vs. active investing."

The Seeking Alpha interview was by Jonathon Liss and was based on Larry Swedroe's ninth book titled: "The Quest for Alpha"..... Excerpts of the Liss interview:

Larry Swedroe said: "There basically are no experts when it comes to forecasting and this isn't specific to finance.

I'll give you an example from my own experience. I worked at Citicorp where we had some of the top economists in the country. And I ran trading rooms. When I was right, I of course took credit for my 'brilliant' analysis. And when I was wrong, it was always because of some unexpected event that no one could have predicted. What I learned ultimately is that there is no way to consistently be a successful forecaster. I was either lucky or unlucky.

People say, "Well what about Warren Buffett?' Buffett rarely trades. He's extremely passive in his approach. He doesn't believe in forecasting market direction and he regularly says so.

One last story about why you should ignore all forecasts. A year ago the chief economist at Goldman Sachs said the single biggest risk to the economy was deflation. At the same time the chief economist at Morgan Stanley had the exact opposite prediction, believing significant inflationary risk was imminent. Now I think you and I can agree that both of these guys are really smart. You don't get to be the chief economist at Goldman or Morgan otherwise. So how are you supposed to decide between them?

One more story. In July 2009, the WSJ polled 50 top economists in their annual interest rate contest. Guess how many correctly guessed the direction of the 10-Year Treasury? Seven. Guess how many got the big number right, the number before the decimal point? Two.

So to get back to your initial question, and I apologize in advance for saying this, but I think the sort of analysis that is predictive in nature is fairly dangerous, because it gets people to act when inaction is far more likely to be the right strategy."

Excerpts from my summary of the Larry Swedroe Moneytalk interview March 1, 2008:

Bob Brinker began the interview with Swedroe by asking him what he thought about the effect of negative campaigning by the presidential candidates on the stock market.

Larry Swedroe said:
“It’s very difficult for people to deal with the emotions that are caused by bear markets and all the bad news – they tend to panic and sell –and that’s why they end up with lousy returns. You know, one of my favorite sayings, Bob, is that bear markets are the mechanism by which money is transferred from those with weak stomachs and no plans to those with strong stomachs and a well thought out plan, so that strong stomach gives them the discipline to stay with that plan.

I’ll add one last thing which is really incredible, I think will shock most people. If you could perfectly time recession so your crystal ball allowed you to get out of the market before a recession and get back in the day after it ended, there have been 11 recessions in the post-war era. The stock market has actually gone up an average of 7% during those recessions and that would have out-performed riskless Treasury Bills, say a short-term parking place while you waited for the recession to end -- so very, very difficult to try to out-fox the market.”

Bob Brinker replied to Larry: “Of course at this point Larry, as you well know, we have not had a bear market. As we speak the S&P is 15% under its closing high, (Honey in edit: Now we know in hindsight the S&P dropped 57% under its closing high) and it’s been as much as 16% on January 10th, so right, we are solidly in correction territory. My question to you would be, how could it be that with all of the bad news that we have had –and I’ll tell you what we have had an avalanche of bad news out there, including the credit markets in just complete disarray in some areas – with all of the bad news that’s been out there, and all of the recession verbiage that’s out there, how could the market just be down in a correction of 15% -- that’s not a big deal?" (Honey in edit: Be careful about believing Brinker when he says "it's only a correction.")

Larry Swedroe said: Yeah, well ahh, you know, I think that’s the great mystery. If any of us knew the answer to that question, we’d all be a lot richer than we are. Nobody has shown, really, any great ability to forecast the stock market."

Honey EC: One exception to Larry's rule might be people who get rich claiming they can forecast the stock market.

Jonathon Liss (Seeking Alpha) made these comments Larry Swedroe's latest book:
"I want to first say that I really enjoyed this book on a personal level. In a relatively small amount of space you lay out the case for passive over active investing in an articulate and highly accessible way. It seems to me from the many hours of financial reading I do daily on Seeking Alpha and across the web that the average investor - and that includes professionals - doesn't have any clue about the wealth of data you present favoring passive over active investing approaches, has no concept of the significant obstacles they would need to overcome to actively outperform passive strategies. How do you explain this phenomenon?"

Dixiegeezer's Swan Couple:

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