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A parable for today's investor:
Diversify and hold steady against doom-saying.
(cont.)
What historians (and psychologists) find so interesting is not Miller's prophecy. Apocalyptic timetables have been around for ages. What's telling is the fact that when he set a specific date his movement actually gained momentum – even though he'd been proven wrong only a few months earlier.
For purposes of divining the fate of today's stock market, let's call this the
Law of Apocalyptic Vision:
The more specific a market prediction,
the more likely some will believe ... and act on it.
Last year there were more than a handful of Millerites roaming Wall
Street in the wake of the sub-prime mortgage fiasco.
In the aftermath of the meltdown, with millions of homeowners suddenly
"upside-down," stocks in a freefall, hundreds of mortgage companies out of business overnight, credit all but vanished, the Fed frantically slashing interest rates, hedge funds invoking lock-up policies to prevent runs on their capital, and securities firms laying
off brokers
a number of analysts and writers rushed into publication with
speculations and now-embarrassing forecasts.
There were wild intimations of the dollar's "terminal decline" against the euro,
or of China secretly liquidating its entire near $1-trillion holding in T-bills
thus triggering an "economic winter" in the United States.
And, as you'll recall, last fall analysts scrambled to be the first to predict
calamitous declines in the Dow – 20, 30, 40% by year's end, take your pick.
(Facts: the Dow finished 2007 up 6.43%; the broader
S & P 500 finished 2007 up 3.53%.)
Katrina or Bust
This is the same kind of instant doom-saying that followed Hurricane Katrina.
Some analysts in the fall of 2005 predicted claims would top $500 billion – and bankrupt many of the nation's property insurers.
For nightly television viewers of Gulf Coast devastation, half a trillion
seemed a plausible number at the time. But in fact, claims were one-tenth of that, roughly $50 billion. It was the largest single underwriting payout in history – but not
one insurance company tanked.
More to our point, since Katrina the nation's top insurers have posted their
two most profitable years. Ever.
The Dow also rises.
The sun did come up in 2008. And once again the stock market, albeit
battered, has proven resilient.
No one predicted (nor could have) that less than a month after the shocking vaporization of one of the world's biggest investment banks – Bear Stearns – the Dow would rally nearly 1,000 points. But that is precisely what happened during one amazing week in April.
Which brings us to Holland's Law:
Market predictions can only work in a vacuum –
if no one is reacting to a current situation.
But, obviously, world markets are constantly reacting.
Every hour of every day, markets are digesting and
factoring new information.
In other words, hundreds of thousands of people – executives, government officials, investors – are constantly working to alter the present. This is why "timing"
the market is virtually impossible. And why picking winners and losers should be left to sportswriters.
(cont.)
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