Fall From Grace
The financial industry tends to promote the reliance on investment experts or gurus as a necessity for individual investor success. These experts, or professional investment managers who run mutual funds, institutional portfolios and hedge funds, actively buy and sell stocks based on their predictions of future events.
During Premier’s 25 years in business, we have grappled with the soundness of this approach to investment management and its impact on long term client success. Countless times we have seen investment managers with great performance records fall from grace, causing investors considerable pain. After years of searching for a way to systematically and reliably identify winning investment managers, we came to the conclusion that our efforts were in vein.
Over the last 13 years we have made a fundamental shift in our approach to investment management and client relations. By leaving behind the search for the hot hand or trendy investment products, we were able to shift our focus to what truly matters for clients – developing personal relationships with them and helping them achieve diverse financial goals. For more than a decade we have been firmly committed to providing a better investment experience and to educating investors about the fallacies and pitfalls that the financial industry lays before them.
Unfortunately, this is far from the norm in our industry, which continues to be dominated by performance chasing, stock picking, market timing, and other activities shown to actually detract from investor success over the long run.
And why is this important to you? If you own mutual funds or variable annuities, are invested in a managed money program with a brokerage firm, bank or insurance company, or if you buy and sell your own stocks based on the recommendations of market newsletters, financial pundits or your own broker, your financial future is likely reliant upon the success or failure of investment gurus.
We think that’s a problem and CXO Advisory Group agrees. This group’s mission is to determine whether or not financial industry experts provide reliable stock market guidance. Their Guru Grades website systematically reviews the publicly available market calls from 52 well-known industry experts and reinforces our concerns about relying on investment experts for your financial success. Similar to volumes of empirical research, CXO concludes that stock market experts as a group do not reliably beat market rates of return.
Two highly proclaimed industry gurus, Ken Fisher and Jim Cramer, are showcased on the site which reveals the inaccuracy of their predictions. We are hopeful that these examples will lead you to reevaluate your own, or your advisor’s, current investment strategy.
Ken Fisher
Ken Fisher is a Humboldt State Alumni who has amassed a personal fortune managing money for individual and institutional investors, some of whom reside in our own community. Ken takes pride in his long-term investment prowess and his website notes that “only an expert can predict a bear market before it happens, and then move your money into the right kind of investment.” Predicting the bear market is of course the challenge and the problem as you will see in the following quotes from Ken’s Forbes.com commentary.
10-15-2007: With the S&P 500 near an all time high of 1548 Ken said, “you should be…bullish!…The Bears are wrong…by December buybacks and takeovers will both be back and stocks will be soaring.” Ken was a bit misguided in his optimism as the market proceeded to decline 56% over the ensuing 17 months.
12-10-2007: Refusing to throw in the towel Ken boldly declares that “there’s room for more of a bull market ahead. I want to be the first to say we definitely are in a New Era of above-average returns…I’m expecting another above-average year ahead, an easy one…buy stocks and be happy.” The S&P 500 lost approximately 37% in 2008, which turned out to be one of the worst years on record and a far cry from the above-average year Ken was envisioning.
6-16-2008: Standing his ground he notes that “now that we’ve had a full-fledged correction that scared the dickens out of everyone, stocks look wonderful.” The market dropped 50% after this bold call.
9-1-2008: Providing the expert guidance Ken promises on his web site, he noted that “it would be risky to get out now and end up being whipsawed – that is, exposed to most of the decline but absent for most of the recovery. Now is time for patience.” Patience resulted in a 40% decline in the following three months.
Jim Cramer
Jim Cramer, former hedge fund manager, bestselling author, and host of CNBC’s Mad Money, is also found on the Guru Grades website. You may be surprised to learn that the stock picks highlighted in his New York Metro “Bottom Line” commentary have landed him a below average rating among Gurus with just 46% accuracy. On his TV program Cramer constantly reminds viewers about how right he has been throughout this difficult market, but his published market calls indicate a radically different outcome.
10-1-2007: In light of monetary easing from the Federal Reserve, Cramer notes that “I’m now confident that what would have been a given in 2008, a brutal recession…will now be avoided and prosperity assured.” We don’t know of too many people feeling overly prosperous right now and it seems that the only thing we may have avoided is a global depression, not a deep recession.
1-7-2008: Again focusing on fed policy action, Cramer notes that “if Bernanke or a future Fed chair does cut rates meaningfully, here’s a sure bet: That’s the time to start buying.” The Fed cut rates to 0 yet the market proceeded to drop over 50% from the time of this statement.
3-21-2008: In a fit of optimism Jim boldly states that “I call it a bottom. Not just for the stock itself, which happens to be the venerable Bear Stearns, but for the whole stock market.” Unfortunately, this came just weeks before the collapse of Bear and major difficulties in the equity markets.
11-30-2008: Assuming things couldn’t get worse, Cramer notes that “it would be…reckless to stay so negative now…it’s worth taking some sidelined money (note that I said some) and putting it back to work again.” By early March those reinvested assets would be worth 76 cents on the dollar.
Conclusion
Our purpose in writing this is to show how difficult it is to consistently and accurately forecast markets. Whereas we do not question the ambition, drive, or intelligence of professional money managers, we know that in the ultra competitive capital markets, it is exceedingly difficult to gain a lasting competitive advantage and to beat the overall market consistently.
If you own the types of investments mentioned in this newsletter, your financial future likely rests in the hands of financial market “experts” who are buying and selling stocks and bonds based upon their own predictions and forecasts. As volumes of empirical research indicate, this is a losing proposition that has led to lackluster performance in many investor accounts.
Despite what the public is told by Wall Street and legions of advisors, there is a better way to invest in the markets. You can rely less on the highs and lows of professional money managers and, instead, focus on the several controllable factors that have been shown to lead to a more successful long-term experience. Please give us a call to see how you can take more control over your financial future and increase the likelihood of your investment success.
Second Opinion Service
Given the enormous turmoil within major financial firms and increasing levels of consumer dissatisfaction with brokerage firms, banks, and insurance companies, we are offering investors a free, no obligation second opinion service with one of our Certified Financial Planners. This service will provide you with valuable insight regarding your current investment portfolio and financial plan. We are experiencing significant demand for this service and would like to extend this offer to you. Please call Lauren Marchbanks at (707) 443-2741 to schedule a time for us to meet.
