Why 20-Year Market Predictions Aren't Worth Your Time
by Alexander Green, Investment Director
Monday, March 16, 2009: Issue #956
"I have been taking Chris Martenson's Crash Course," writes a reader. "He believes the next 20 years for investors will be nothing like the last 20. It's a pretty scary scenario. Can you refute his facts?"
I don't know Chris Martenson and I haven't taken his course, so I can't refute his analysis. However, I really don't think it's worth anyone's time to listen to 20-year projections.
Twenty years ago, the Soviet Union was occupying Afghanistan. Forget about how much Afghanistan has changed. Today there is no Soviet Union.
Who was predicting that?
- Twenty years ago, mobile phones were heavier and only slightly smaller than a football.
- The Internet - as we know it today - didn't exist.
- We were providing weapons and technical support to a Middle Eastern dictator most Americans had never heard of named Saddam Hussein.
- A young black man named Barack Obama was just entering law school. In his wildest dreams, he could not have imagined what lay 20 years ahead.
Nor can Chris Martenson or anyone else tell us with the least bit of reliability what lies 20 years ahead of us now. Martensen may be a very smart guy. But, I'm sorry, the world just isn't that simple.
20-Year Market Projections With Harry Dent - The Roaring 2000s Investor
My skepticism has nothing to do with Martenson's pessimism, by the way. I was just as dismissive of economist Harry Dent when he published the "The Roaring 2000s Investor" in 1999.
In this bestseller, Dent argued that:
- Baby boomers saving for retirement - and other cast-in-stone demographic factors - made it inevitable that we were headed for an era of fantastic prosperity and booming stock markets for years to come. Describing himself as an "economic futurist," he confidently predicted that the Dow would hit 44,000 by 2008. We now know he was off by 36,000 or so points.
- Dent also argued in favor of Nasdaq stocks and predicted "the technology revolution will favor Internet- oriented companies." Within three years, the Nasdaq lost three quarters of its value and the leading index of Internet stocks plummeted 89%.
- Dent forecasted that Argentina would see "moderate growth until 2015 and then stronger growth into 2025." No, Argentina would suffer a currency collapse and financial crisis followed by rioting, social unrest, and years of economic stagnation.
And so on ...
It's obvious now just how wrong Dent was. But back then most investors agreed with him. He sold hundreds of thousands of books and raked in millions as an advisor to top Wall Street firms, including Morgan Stanley.
The Great Bears' Market Predictions
Today it is the great bears' market predictions that everyone is listening to. We're in a depression that will last for years and perhaps decades they tell us.
How could they know this? What kind of crystal ball - excuse me, "forecasting model" - do they have? And what is their track record when it comes to making predictions like these?
I can tell you. In almost every case, the super bears are individuals who have been saying much the same thing for decades or, like Henry Blodget who suddenly materialized as the celebrity cheerleader during the Internet mania, have mysteriously appeared on the scene with no history of success but a boatload of outlandish projections.
I've said it before but it's worth saying again...
- Investment success doesn't come from following the right predictions.
- It comes from following the right principles.
Forget Market Projections - Follow A Long-Term Investment Strategy
Some investors complain that principles like diversification, asset allocation and trailing stops haven't worked. But investors who follow these principles have made out much better than those who haven't. Moreover, you don't judge a long-term investment strategy by short-term results.
As I noted last week, if you bought stocks after the market declined more than 50% during the 1930s, you made a lot of money over the next 10 years - and beat every other asset class over the next 20.
Yet now some bears are growling this will be even worse - and longer - than the Great Depression.
I don't think so. True, the U.S. economy is in a bad way. But, eventually...
- The banks will lend again.
- Companies will hire again.
- Consumers will spend again.
- And markets will rise again.
Granted, I can't predict the next 20 years either. Investors must always live with a certain amount of ambiguity.
But you have a choice. Either you follow time-tested investment principles or you fly by the seat of your pants (or by the seat of some guru's pants).
Personally, I'll take the former. As Patrick Henry famously said:
"I know of no way of judging the future but by the past."
Today's Investment U Crib Sheet
Eventually the papers will stop talking about the crash or the bottom, and focus instead on the recovery. Remember that Mr. Market is a forward pricing mechanism. It isn't focused simply on tomorrow, or the day afterwards.
Instead, Mr. Market is focused on the months, years and decades of our future. And because the outlook for them is going to be considerably more positive than today, the markets will rise. It doesn't matter if we've reached bottom, but rather that there are real values out there.