How to Beat the Market Experts

By Jimmy Pickert, CFA, CRPS®

Jimmy Pickert, CFA, CRPS®

Jimmy Pickert, CFA, CRPS® Portfolio Manager

It was hard to miss market pessimists on CNBC and other financial news channels last year.  In November of 2014, well-known investor Marc Faber, renewed his claim that the market is poised for a 20% decline in the near future.  Plenty of panic also went around in May of 2014 when hedge fund manager, David Tepper, told investors that it was time to get nervous, and private equity guru David Rubenstein shared his view that stocks have become overvalued.  Around the same time, Peter Boockvar, Chief Market Analyst at the Lindsey Group, told CNBC that the end of the Fed’s bond-buying program in October “will bring a drop of 20% or more.”  The list of bears goes on, and includes other high-profile names like Dennis Gartman and Ralph Acampora.

More often than not, it’s better to ignore the noise.  Between those bearish calls in May and the end of the year, the S&P 500 returned 8.31%.  October was a volatile month, but if an investor had turned off his or her TV between the end of September and the third week of October, they would be oblivious to the panic around ISIS, Ebola, and the end of the Fed’s easy money policy.  Within days of Gartman’s mid-October appearance on CNBC warning viewers of the start of a bear market that could last for several months, stocks turned around, and have more than made back losses from the October slump.  Market pundits often have more difficulty predicting the market than most people realize.  A study by CXO Advisory that collected over 6,500 expert forecasts between 1998 and 2012, found that these experts were accurate only 47.4% of the time.  In other words, you can beat the experts as long as you have a coin to flip.

Plenty of investors think that, at the very least, they are preserving some gains by timing the market and selling off during the first signs of trouble.  What many fail to realize is that these signs of trouble—perhaps a bad day or week in the market, driven by a global flare up or disappointing economic news—are often followed by strong rebounds that drive annual performance year after year.  Between 1993 and 2013, the S&P 500 returned 9.2% annually.  Taking away the best 10 days during that period brings that return down to 5.5%, and missing the best 20 days would produce a return of about 3.0%.  If an investor missed the best 40 days, they would have lost money.  It is about time in the market, not about timing the market.

Despite the calls of many respected analysts and hedge fund managers for a major correction during the second half of last year, the market performed well.  Market pessimism tends to make for good TV, and bearish analysts know that sooner or later, their predictions will pan out.  The stock market fluctuates, but investors should ignore the noise and continue to focus on their long-term investment goals.  ACG can help you develop a portfolio designed specifically for your risk levels, so that you do not have to get in and out of the market, or keep up with the latest news from CNBC.  There will always be market pessimists.  Marc Faber made the same prediction of 20% declines in October 2012, since which time the S&P 500 has risen more than 40%.  Of course, the experts don’t always forecast bad news. David Tepper has recovered from his stressful summer, and recently commented that he expects 2015 to be a “good year.”

— Posted on January 08, 2015 by Jimmy Pickert, CFA, CRPS®

— Topics: Market Performance