Sales pitch often based on recent successes

By DAVID MOON, Moon Capital Management, LLC
August 23, 2009

Robert Prechter is the publisher of the investment newsletter The Elliott Wave Theorist. He’s been on CNBC a lot recently, after predicting the bear market than began in the fall of 2007.

He has been predicting stock crashes as long as I can remember, at least since the 1980s. In one of his recent books he predicts that the Dow Jones Industrial Average will fall into the triple digits.

That’s right...below 1,000.

I thought the guy was a goofball when I first read his materials 25 years ago. My opinion hasn’t changed, despite his recent “correct market call.”

Then I began to think about all of the press Prechter is receiving. He also has a new book he is selling. He is probably selling a ton of books and newsletters based on his recent market genius.

This, irrespective of the cumulative accuracy of his previous predictions.

What if there are 5 or 10 Robert Prechters out there, secretly in cahoots with one another, each making crazy – yet unrelated - market predictions?

One guy is a wild bull. He constantly predicts that the market is going up. Another guy is a fan of gold. Another guy loves foreign stocks.

Someone would need to be the perpetual negative guy, like Prechter.

If each of these market prognosticators had his own newsletter, one of them would always be right. The others would look like idiots, but the one genius could sell a bunch of books and newsletters … until he looked stupid again.

At which point one of his co-conspirators would look like a genius.

Then they would split their combined profits.

I am sure Robert Prechter is not involved in such a scam. His positions are quite sincere.

The outrageous scenario I just described is not too different from what exists at many brokerage houses, banks and mutual fund companies. In their arsenals they have hundreds or thousands of funds or investment programs. One of which is bound to have recently performed well.

When you receive a solicitation call from your friendly would-be financial advisor, you can be assured that he is going to be able to offer you an investment choice that just outperformed 90 percent of the investment choice universe.

Of course, he has plenty of options that underperformed 90 percent of the investment choice universe. But you won’t see those. It would be self-defeating for the advisor to show or disclose those. People are inclined to invest in the thing that most recently performed well.

This is not an easy and simple problem for individual investors to avoid. If you are trying to assess the quality of an advisor, you might prefer to know what his clients actually owned in the past year (or five years), as opposed to what he wishes they had owned.

Or perhaps you’d be well served knowing what a prospective advisor thinks will do well over your future time horizon.

Looking at last week’s winning lottery numbers will not help you pick this week’s winners.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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