A Crash Course in Investing Six Lessons from the Market Meltdown

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Dougal Williams

The market decline from October 2007 to early March 2009 was the worst since the late 1930’s.  Stocks dropped 60%, investor uncertainty skyrocketed, and trust and confidence were shattered.  The age-old rules for personal investing are now being questioned:  Is Buy-and-Hold dead?  Has Asset Allocation outlived its usefulness?  Does Diversification still work?  The answers contained in the following lessons serve as a guide for long-term investment success.

Lesson #1: No one has tomorrow’s paper

“Prediction is very difficult, especially if it’s about the future.” 
—Niels Bohr, 1922 Nobel Laureate

The truth contained in this whimsical quote reminds us that, in at least one respect, 2008 was not unique:  it was just as hard as ever to beat the market by following the advice of Wall Street forecasters.

Here’s a review of the “where to invest now” advice offered by the country’s leading financial magazines at the start of 2008:

To help its readers navigate an uncertain market, BusinessWeek sought out guru Elaine Garzarelli, best known for advising her clients to sell just before the 1987 stock market crash.  The “extremely bullish” Garzarelli, whose early 2008 models showed the S&P 500 to be “undervalued by 25%,” urged investors to load up on Lehman Brothers, Bear Stearns and Merrill Lynch. 1  Oops.

In early January 2008, Fortune interviewed successful former hedge fund manager, globetrotting author and commodities bull Jim Rogers for tips on where to invest in 2008.  Rogers favored commodities (“the commodities bull market still has years to go”) and China (“there are gigantic opportunities in China”).2 In fairness to Mr. Rogers, he was   making long-term recommendations, not a 12-month forecast.  Investors who over-weighted their portfolios with either commodities (down 37% in 2008) or Chinese stocks (down 51%) are still hoping he is right.

Expert Stock Picks

For its annual “Where to Invest” issue, SmartMoney asked a prominent Wall Street strategist to help recommend stocks of companies “likely to increase profits in a world filled with trouble spots.”3 Unfortunately for followers of the magazine’s advice, the average share price decline from recommendation date through year-end 2008 for the dozen stocks listed was 52.4%, more than fifteen percentage points below that of the S&P 500 Index.

Longtime Forbes columnist, author and money manager Ken Fisher looked into his crystal ball and recommended “a whole new type of stock for 2008,” presumably one which could flourish in a year which was more likely to see a “robust market than a bust one.”4 From the January recommendation date through the end of the year, Fisher’s five stock selections plummeted 55%, on average, far worse than the U.S. market’s 37% slide.

So, the next time you read an “expert” forecast, remember the words of legendary investor Warren Buffett:  “A prediction about the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting.” 

1 Tergesen, Anne.  “What the Pros are Saying.”  BusinessWeek, December 20, 2007.

2 O’Keefe, Brian.  “Hog Wild for China.”  Fortune, December 24, 2007.

3 Pearlman, Russell.  “Where to Invest in 2008.”  SmartMoney, December 17, 2008. 

4 Fisher, Ken.  “We’re Too Gloomy.”  www.forbes.com/forbes/2008/0128/106.html . January 28, 2008.  Accessed February 18, 2009.