Peak Hubris: Challenging Dalio and Grantham
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In the past month, two well-known and highly respected money managers have made confident assertions about the markets. Their comments would lead one to believe that the future path of the market in the coming months is known. Sadly, many investors put blind faith in the words of high-profile, accomplished professionals and do little homework of their own. While we certainly respect the background, knowledge and success of these and many other professionals, we take exception with their latest advice.
Before the election In November 2016, were there investment professionals who claimed a Donald Trump victory would drive equity prices significantly higher? There were (very) few, they certainly were not publicly discussing it, and the broad consensus was overwhelmingly negative. In March of 2009, which professional investors were pounding the table claiming that the next decade would produce some of the greatest market returns in history? Again, while some may have thought valuations were fair at the time, few if any were raging bulls.
The two examples are not unique. More often than not, investor expectations fail to accurately anticipate the future. This is not about individual investors; it applies to the best and brightest. Despite the urge to heed the sage advice of the “pros,” we must remain objective, especially when everyone seems so certain about what will happen next.
The known future
Until the recent market volatility, the message from Wall Street analysts, media gurus and most investors was that stock prices will undoubtedly go up for the foreseeable future. Unbridled optimism about corporate earnings offer one point of fundamental justification for such views, but in large part those forecasts were predominantly based on the simple extrapolation of prior price trends. In late January 2018, a few esteemed Wall Street analysists actually raised their year-end S&P 500 price forecast from what they were only weeks prior. Although rationalized by stronger estimates of earnings expectations and an improving economic prognosis, the fact that January’s market rally had the S&P 500 already approaching their year-end forecast also played a meaningful role.