It seems like so long ago, but the end of 2018 was miserable for the stock market. The S&P 500 dropped almost 20 percent. Misery dominated the financial press, as public prognosticators turned markedly bearish. The January 4th Wall Street Journal headline screamed that the first two trading days of 2019 were the worst since 2000 – the beginning of a bear market that saw the S&P 500 collapse 49 percent.
Many investors – even people who get paid to know better – simply assume that the near future will look a lot like the recent past. It’s a great strategy for buying high and selling low.
In late 2018, after the stock market had dropped swiftly and significantly, one of the really smart analysts at Goldman Sachs thought that investors were generally too heavily invested in stocks. “Cash will represent a competitive asset class to stocks for the first time in many years,” read the Goldman report. With egg on its face, what did Goldman say after the market proceeded to increase more than seven percent in January? “If you miss the January rally, you likely missed the 2019 gain.” Wrong; the S&P 500 has increased almost another 10 percentage points since then.
After a six-month, 17 percent increase in stock prices, Goldman issued a bullish report on July 1. “We remain modestly pro-risk for [the next twelve months.]”
Part of the problem is how we define an “expert.” In the investment world, being an expert requires being reasonably articulate, knowing some intellectual-sounding investment words and being available when a network has some empty airtime. Experts were also once required to wear $1,000 suits, but that condition has been eased for experts under the age of 25.
I chuckle when CNBC includes disclosures from the experts it interviews. “This guru owns no shares of the company he is discussing” is touted almost as a virtue. “Look; this guy has no conflicts!” He also has no skin in the game. If he is so convinced about his opinion, he should put his money where his mouth is.
Even experts can suffer from something psychologists call recency bias. That is, the tendency to be most influenced by information we received most recently, whether that information is pertinent or not. The biggest pitfall for most investors, however, is the silly notion that anyone can accurately forecast near-term changes in stock prices.
Of course, without someone to tell us what the stock market is going to do over the next six months, how would CNBC fill 50 hours of live programming each week? What difference does it make if the forecasts are accurate, as long as they sound smart?
David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.