Monday, July 1, 2013

The Fallacy of Predictions, Or Saving Investors From Themselves

I have often wondered whether Fed Chairman Ben Bernanke is every tempted to remind his current chorus of skeptics of just how wrong their doom-and-gloom forecasts have been in the past.

Floyd Norris wrote a column for Saturday's New York Times recalling the intense criticism that Bernanke endured when the Fed started its so-called Quantitative Easing program in 2010:

A group of 43 economists, including former aides to Republican presidents and presidential candidates, published an open letter to the Fed’s chairman, Ben Bernanke, saying the program should be “reconsidered and discontinued.” The planned bond purchases “risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment,” the economists wrote. 

The Fed did not back down, and Republican efforts to pass legislation removing the Fed’s mandate to seek full employment were not successful. The next year, the Fed moved on to what became known as Q.E.3, also known as Operation Twist, an effort to bring down long-term interest rates by purchasing longer-term Treasuries. That move was criticized by Republican leaders even before it was announced. “We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy,” the Congressional leadership said in a letter sent to Mr. Bernanke while the Fed was meeting. 

Now Bernanke is under attack for suggesting a couple of weeks ago that the economy may be strong enough for the Fed to consider tapering back its intervention.

The irony must not be lost on the Chairman.

Saturday also brought an excellent column in the Wall Street Journal by one of the best financial journalists writing today, Jason Zweig.

In a piece titled "The Intelligent Investor: Saving Investors from Themselves", Zweig noted that many of the columns he wrote over the years were not well-received, especially when they clashed with conventional wisdom.

Here's an excerpt, but I would urge you to clink on the link to read the whole column:
But this time is never different. History always rhymes. Human nature never changes. You should always become more skeptical of any investment that has recently soared in price, and you should always become more enthusiastic about any asset that has recently fallen in price. That’s what it means to be an investor.

When, in the fourth quarter of 2008 and 2009, I repeatedly urged investors to hold fast to their stocks, I was called a shill for Wall Street and helplessly naïve.
When I took a skeptical look at Congressman Ron Paul’s gold-heavy portfolio in December 2011, angry readers called me “weak minded,” “ignorant,” “pathetic” and a member of “the big bank lobby.” (Gold was around $1,613 per ounce then; it was last sighted this week sinking below $1,230.)

When, only a few weeks ago, I warned that any hints of a tighter policy from the Federal Reserve could crush recently trendy assets like real-estate investment trusts, high-dividend stocks and “low volatility” stocks, readers protested that I didn’t even know the difference between a rise in interest rates and “tapering,” or a decline in the rate at which the Fed buys back bonds. I know the difference – but, with many of these assets down by up to 10% since then, it isn’t clear that all investors knew the difference.

Every columnist knows that if you ever write something that didn’t make anybody angry, you blew it. People don’t like having their preconceived notions jolted, and doubt and ambiguity are alien to the way most investors think.