Henry Blodgett was the poster child for the abuses of the financial markets in the 1990s. He went on to launch
Business Insider, which became the web most popular business news site. It (well, 88% of it) was just sold to the German publisher Axel Springer for $340 million.
On Sunday, he published an essay which concluded that we should
anticipate "weak" or "crappy" returns for the next decade. The argument is simple and familiar to folks here: stocks are "fantastically expensive relative to most of recorded history." Vigorous government intervention prevented the phenomenal collapse that would have returned market valuations to typical bear market lows, building the base for a decades-long bull. Zero interest rates and financial engineering conspired to keep stocks from becoming appropriately loathed (though it it clear that many institutional investors are, for better or worse, making structural changes in their endowment portfolios which brings their direct equity exposure down into the single digits).
He doesn't offer any particular advice on how to react, he just predicts the pattern.
For what interest that holds,
David
Comments
Professor Snowball references an almost forgotten name from the past, Henry Blodget. He and Mary Meeker became famous for making rather outsized stock predictions during the dot.com boon years. Some were right, some went terribly wrong.
The SEC filed a civil securities fraud charge against Blodget that was settled with no guilt admission. He was banned from working in the US securities industry. I suppose many Americans have forgiven him.
His current muted returns projections are based on historical returns and illustrated by chart analyses. His conclusions are similar to many other market pundits. I tend to agree with it, although I also agree with his acknowledgement that projections are just unreliable projections.
But the exercise does serve a purpose. It helps to lower unrealistically optimistic forecasts. Minimizing these expectations just might encourage an antsy investor to stay the course.
My moderate term forecasts (like for a 10 year period) are more easily made. They are grounded in an analysis that John Bogle endorsed in his “Common Sense on Mutual Funds” book. He related equity returns to dividend yield at the time of the initial prediction, to expected earnings growth, to inflation rates, and to likely P/E ratio changes.
A few years ago, I correlated corporate earnings growth to GDP growth rate. The multiplier was 1.8 X GDP growth rate. Using estimates for dividends (2%), for earnings growth(1.8 X 2.5% =4.5), for inflation(1.5%), and for P/E change (-2%), I project an equity return that includes inflation impact of 6.0% annually for the next decade.
Of course, as things change, so does the forecast. The P/E change is especially flakey given it is such an emotionally charged issue. Good luck on all this happening.
Although Blodget doesn’t make specific portfolio recommendations or adjustments, he does report that he holds a diversified portfolio that incorporates bond and cash positions. In a sense, that it a generic portfolio strategy recommendation that rejects market timing projections, including his own.
I trust no MFOer takes my projection too seriously. I don't.
Best Wishes.
Given his forecast, I'm really not sure what a prudent portfolio prescription might be, but I think a good diversified mix would be a good default. Divi payers may also be a nice sleeve...or at least I'm hoping so.
His gloomy diatribe plus Dr. Snowball's revelation of Henry Blodgett's windfall brought to mind a very old joke...the cleaned up version is:
Doctor wakes his patient and says "I've got good news and bad news."
Patient: "Give me the bad news, first."
Doctor: "You have three months to live."
Patient: "OMG! What could the good news possibly be??"
Doctor: "See that nurse over there? I'm dating her."
press
bada bing, bada boom...and don't forget to tip your waiter!
Thanks for your funny story. Allow me to join the game.
A gunman jumps a well dressed middle aged white man. He sticks a gun in his ribs and demands “give me your money”.
The assaulted man replies ”You can’t do this-I’m a US congressman.”
The gunman revises his demand: “OK, give me MY money”.
And one more round for the road. Let’s give this one a chance.
A lawyer announces that he has both bad news and terrible news. What order of delivery is preferred.
The recipient says to “Give me the bad news first”.
The lawyer says that the recipient’s wife” just received a photo worth a million dollars.”
The recipient is stunned. He says: “If that’s the bad news, I can’t wait to hear the terrible news”.
The answer: “The terrible news is that the photo is of you and your secretary”.
Enough fun for now. I hope you enjoyed these mild jokes as much as I do telling them.
Best Wishes.
Thanks for posting your forecast of six percent average annual gain for stocks over the next ten years. Wonder what bonds are going to do? And, then there is cash?
Here is my thinking ... Like you say, I'll use six per cent for stocks, (my call) four percent for bonds and two percent for cash. With this and based upon my current asset allocation of 25% cash, 20% bonds and 55% stocks (which includes the 5% other assets as defined by M* within my portfolio) I can expect between a four to five percent annualized return over the next ten years on my portfolio. Sounds reasonable to me.
So, if I want to make more I will need to continue to employ some spiffs (special investment positions) from time-to-time as I have been doing in this low interest rate environment. Doing this, might add a percent or two. Or, I could take on more risk and raise my allocation to stocks and bonds while lowering my allocation to cash. Think I'll continue to play the spiffs and tweak my asset allocation form time-to-time as to how I am reading the markets. In doing a look back, Morningstar's Portfolio Manager indicates that my current fund possitions have a combinded returned for the past five years of about 8.5% and for the ten year period about 6.5%. With this, some adjustment (downward) would needed to be made to account for my cash position in use with the above percentages. So, let's knock a percent off of these percentages to derive at what the portfolio would have returned adjusting it for current cash held. Probally, not exact but close.
Currently, I think from a TTM P/E Ratio (21.5) stocks are more than fully valued along with most bonds. With this, I am going to stick with being cash heavy for the time being and employ the spiffs.
Thanks again for posting your insight. It is appreciated.
Best regards,
Old_Skeet
Doctor wakes his patient and says "I've got good news and bad news."
Patient: "Give me the good news first Doc."
Doctor: "You have one day to live."
Patient: "OMG! What could the bad news possibly be??"
Doctor: "I tried to wake you up yesterday."
(Don't mind if I DO add to the levity:)
An old guy and an old gal have known each other since childhood. They are in the same institution, now. She remains sharp, he's less so, by now.
They pass in the hall. She says to him: "Take down your pants and I'll tell you how old you are."
Trusting her implicitly, he does so. She says: "You're 86."
Whaaaa? How did you know that?
"You told me, yesterday."
***************************************************************
Oh, the horror! The horror!
It's nice to see Hussman get some attention. No - Really.
I've heard the same argument couched differently from some other money managers. They maintain that with interest rates so low for so long, bonds are likely to produce only something like 2-3% returns over the next decade - and equities (which they see as tied to bond returns) a bit more, perhaps 3-5%. I don't doubt it - but I really don't know.
Missed, I suspect, in most of these analyses is the future value of the Dollar - a big unknown. A real 3% annual return on equities over a decade sounds anemic. However, the nominal return (including inflation's effects) might well turn out to be considerably higher. And isn't that a major reason for investing? To keep up with inflation?
Wait! Wait! I just remembered... the water department is digging up all of the streets around here (yet again!). If we count piles of busted-up cement, we do indeed have lots of rock piles.
Were they stupid or corrupt or just corrupt? Are we not going to listen to them now because they lied before or because we don't think they don't know WTF they are talking about.
I think we should listen to everyone but not necessarily act on it. If we don't listen at all, there may be some truth we might miss just because it is blodget saying it. What if buffett said the same thing?
Trust but Verify should have been our mantra before. We only did the Trust.
Now lets not Trust, but let's continue to Verify.
- there was vast corruption on the part of both sub-prime lenders and Wall Street investment houses
- it was an entirely reportable story, in the sense that there were a dozen or so spectacular exposes
- but it was almost entirely ignored. The coverage that did occur focused on "little picture" stories - mortgage packagers had female employees exchange sex for access to sub-prime loan bundles - but skipped the "big story," which is that Wall Street demanded more CDOs/RMBSs at any cost.
By the authors' calculation, the top nine financial media outlets might have generated 800 articles that touched on some aspect of the problem over four years. Sounds good until you realize that the WSJ alone published 220,000 articles in the same period. So, 800 out of a million articles total? 0.08% of the total?The article also begins with a review of the profession's vehement defense of itself: "we did too provide clear, timely and ongoing coverage!" The central response to those claims was that for every warning published on page D4, there were a hundred fawning profiles and a thousand business-as-usual stories.
Oh, right, Blodget. Yep, he was famously an a-hole. Might be penitent and reformed. Might simply be finding ways to channel his core impulse toward fame, wealth and power in a less-criminal direction. Don't know. The meaningful question is: is his evidence persuasive?
If so, there are two practical matters that follow.
- How do we act intelligently? Where ought our resources go - to a broadly diversified portfolio, to a systemic overweight toward the emerging markets, to a strict "trade the bands" timing system, to CDs or to cases of tuna and dried beans? - to squeeze out that most the market has to offer?
- How do we stop ourselves from acting stupidly? The "OMG! Do something" impulse is disastrously powerful.
Wishing you all a quiet day,David
OJ
It is curious you cite study by Columbia School of Journalism. Unless I'm mistaken it is professor of finance at that same University who was exposed by documentary (I forget) as being completely captured by Wall Street.
Admittedly, two weeks is a very short time. No doubt wise sayers Bloodgett, Hussman and others are looking out a full decade. However, since one poster announced having raised cash to 99% a few weeks back and some others also began raising cash, Mr Market has plowed ahead.
More importantly, inflation-sensitive gold & other metals have bounced hard. Silver, copper, aluminum, platinum - all having nice rebounds. (Check-out the one-month return on some of the precious metals funds.) REITS turned around too, and EM bonds have finally turned upward as the Dollar has begun to weaken. Month ago was likely a good buying opportunity for them.
Where was Goldman Sachs just saying oil was heading? $25 or some ridiculous figure? And some bought that. Six weeks ago it touched $38. Today NYMEX sits near $50. That's a near 24% gain for oil in six weeks. And, the Dow has climbed 6+% over the same period.
Point being, forecasts are just that: forecasts
Key points from their latest essay:
- "High stock prices, just like high house prices, are harbingers of low returns.
- Investing in price-depressed residential rental property in Atlanta is like investing in EM equities today-the future expected long-term yield is much superior to their respective high-priced alternatives.
- Many parallels exist between the political/economic environment and the relative valuation of U.S. and EM equities in the periods from 1994 to 2002 and 2008 to 2015.
- Our forecast of the 10-year real return for U.S. equities is 1% compared to that of EM equities at 8%, now valued at less than half the U.S. C A P E."
Back to class prep,David
http://www.marketwatch.com/story/you-can-stop-panicking-about-the-stock-market-now-2015-10-08
Henry Blodget has been off my radar screen for years. As far as his market forecasts influence my investment decisions, I rank him in the same grouping as astrologers and palm readers. My grandmother from Russia played the nickel-and-dime numbers game using their crystal-ball forecasts. She enjoyed about as much success as the current crop of economic predictors do. Not much!
I surely do not have an accuracy scoring for Blodget’s forecasts. But I do have access to a rather long term scoring completed by CXO Advisory Group for 68 noteworthy market gurus. Here is a Link to the CXO scoring and rankings:
http://www.cxoadvisory.com/gurus/
These “expert” forecasters made about 6800 graded forecasts, and achieved a roughly 47% accuracy score. That’s less than the infamous dart throwing monkey would achieve. David Nassar recorded the highest correct score (68%) while Robert Prechter anchored the bottom position (21%). Some famous market wizards occupied the unimpressive middle ground.
In the forecasting arena, all these “experts” are notoriously unreliable. Their number One talent is that they speak and write authoritatively. I suspect that they truly believe their forecasting skills; they see it as a semi-hard science that obeys laws similar to the natural sciences.
The financial world will never be modeled with the precision of the natural sciences. The financial world is subject to human behavioral biases. Even for identical conditions and situations, we are likely to make divergent investment decisions that are controlled (sometimes more, sometimes less) by unpredictable emotional reactions. Good luck on modeling these.
But we love to make forecasts. At least these forecasts give us the illusion of some control. They are a fun diversion in an intense investment environment. “Just stand still” is not bad advice in many of these circumstances.
Best Wishes.
An oddly uncomprehending conclusion to draw, x n.
Surely you are pulling my chain.
My monkey tossing darts comment is an imperfect restatement of a famous Burton Malkiel claim in his “A Random Walk Down Wall Street” book. He said: “A Blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.”
This image has made the rounds since the mid-1970s. Stock picking is a chancy game with luck being a significant factor.
I was just trying to highlight the futility of expert stock pickers in a colorful manner. Equivalently, I thought about writing that the experts do no better than a fair coin toss in terms of their success ratio. Of course, noteworthy exceptions exist.
I hope this clarifies your incomprehension. By the way, I have no idea what you meant with your “x n” closure? Please explain.
Best Wishes.
That's not directly supportive of the application that MJG makes of it, but neither is his point unclear.
It's a beautiful autumn morning here. There are far better uses of it than getting all pissy with one another. Please resist the impulse.
Off for time with my son!
David
I certainly agree that a war of words benefits none of the participants. It is a total waste of time. Please take note of who the initiators frequently are.
I subscribe to the President Ronald Reagan quote to “trust, but verify”. I seemed to recall that I first read the monkey throwing darts illustration in Malkiel’s tome, but I did some research to verify my imperfect memory.
Along the research pathway, I came across an The Economist article titled “No Monkey Business?” that verified my memory. Here is a Link to that article:
http://www.economist.com/blogs/freeexchange/2014/06/financial-knowledge-and-investment-performance
The article should help to quench any fire. Malkiel did make that claim.
The Economist piece added that “Some researchers have also contested his prediction, but not because they think that he exaggerated the power of randomly picking stocks; rather that he was too modest. Simulating a dart-throwing monkey has resulted in portfolios that would not just beat many investors, but also outperform the market.”
I especially included this particular column because it referenced some equivalent dart tossing work by Robert Arnott and his team. Arnott’s study further established the plausibility of the fictional dart throwing monkey.
The article does not conclude that we should surrender our investment responsibilities, and simply hire some dart throwing monkey to construct our portfolios. On the contrary, the writers say “Since less-developed primates appear to be better at picking stocks than experts, one may be tempted to infer that less-skilled humans would make better investors than those with high financial literacy. Not so.”
Further into the article they write that “The authors (some other authors that are referenced) therefore conclude that “financial knowledge does appear to help people invest more profitably”. Thank goodness, saved in the end; not all our efforts are useless.
As a closure, the authors say that “But empowering investors by boosting their knowledge is probably a good idea at any rate. Surveys often show a surprising lack of fundamental financial and numerical skills.” I totally buy into that argument, especially with respect to a deficient statistical skill set.
Best Wishes.