Monday, January 9, 2012
When To Follow The Crowd And When To Go Against It
Don’t follow the crowd! You’ve been warned over and over, but few are that independent. Breaking away is harder than it looks. We are all familiar with the rebel, the person who breaks all the rules. At the other end of the spectrum, the ultra-conformist seems to follow the rules too blindly. Neither extreme is optimal for trading. It’s necessary to find the right balance. It takes a good deal of experience, soul-searching, and a concerted effort to act independently. It’s essential to develop this skill, especially in markets that seem to change from month to month.
We all have a natural tendency to follow the crowd. There is safety and comfort in numbers. As the human race developed, it learned that its survival depended on banding together and working as a group. We inherited this legacy, and it is shown in the security we feel when we follow the crowd. Without getting into individual differences or the extent to which one follows the crowd, some conform too much and others too little, most successful members of society have seen the virtues in following the crowd. Blind obedience to authority may not be beneficial, but compromise is, to be successful, to protect your self interests, and stay within the bounds of acceptable behavior. You must develop a clear and solid sense of personal values and to develop a clearly defined personal identity. You can then follow the crowd when appropriate, but effortlessly go your own way when it’s necessary to protect yourself.
Although you’ve been frequently warned about the pitfalls of following the crowd as a trader, acknowledge that it is adaptive at times. In the case of long term investing, for instance, it is wise to put your money in stocks that don’t have a great deal of volatility and by all indications, have solid fundamentals that will push the stock up on a fairly consistent basis for several years. If a large enough “crowd” believes strongly that the company will produce profits for months or years, it would be to your advantage to follow them, if you want a safe investment.
Following the crowd isn’t bad all the time, especially for those who don’t like risk. On the other hand, if you are a shorter-term trader trying to profit in markets that seem to change from week to week, as we are seeing these days, you must anticipate and profit from volatility and shorter-term trends. This requires an astute intuition about where the markets will go next. Anticipate how the movement of the masses can benefit you as a trader. The key to success is to decide when to follow the crowd and when to go against it. The crowd is usually right, until a turning point occurs.
When virtually everyone has taken the position that the market is headed up, let’s say, there are few traders left to buy and push the trend further. Soon, a countertrend initiates and moves the market down. The challenge is predicting when that turning point will occur, anticipating it, and developing a trading plan to capitalize on it. Now, this all sounds easy, but in practice, it is difficult to implement a trading strategy to capitalize, especially when they happen in the shorter-term, such as days or weeks. How can one predict the turning point? Some say it is almost impossible. All you can do is develop a sound method that works most of the time but also admit that it may fail. You must at least temporarily believe in your method, put money on the line, and work under the assumption that overall, luck will be in your favor should you make enough trades.
It seems like the markets these days are changing from week to week, with weak economic news lowering prices one day and unexpected profits in key sectors raising prices the next. Only the most independent minded and perceptive traders will make a killing. But one thing is certain, in the end, going your own way is the only sure path to profits.
Sunday, January 8, 2012
Wall Street gurus find prediction game gets harder
(Reuters) - With the new year comes a new round of bold predictions for
financial markets.
Blackstone Vice Chairman Byron Wien, among Wall Street's best known prognosticators, on Tuesday unveiled his latest crop of 10 "surprises" for the coming year, such as oil prices plunging to $65 a barrel. BlackRock equity strategist Bob Doll foresees double-digit U.S. stock returns, though corporate earnings growth could lag expectations. And one well-known forecaster declared 2012 too hard to predict.
In the past -- before U.S. housing prices fell and kept falling for the first time since the Depression or the future of Euro zone was at risk -- educated guesses by these and other veteran market-watchers had a good chance of being right.
But these days, volatility is the norm and far-flung political events can send U.S. markets into a tailspin. Skeptics contend it is hard to predict what the world will look like tomorrow, let alone 12 months from now.
That led Birinyi Associates' Laszlo Birinyi, whose stock market forecasts were widely followed, to tell clients he would not be making predictions this year.
"There are too many variables which are beyond our comprehension," he wrote in a client newsletter.
Even Wien and Doll acknowledge this annual exercise has grown more difficult in recent years, as unpredictable events -- like an earthquake and tsunami in Japan, the near collapse of the euro zone and political upheaval in the Arab world -- throw Wall Street's best-known seers for a loop.
PIMCO's Bill Gross, the manager of the world's largest bond fund, kicked off 2012 saying the "new normal" of slow growth has given way to the "paranormal," an environment characterized by credit risk and "zero-bound" interest rates.
Forecasting has become "especially precarious," Doll wrote in his 2012 outlook note for clients.
Speaking to Reuters after a press briefing to review his 2012 outlook, Doll said it used to be simpler to choose between stocks or to recommend sectors of the economy, "but when it's the macro environment driving so many of these things, I do think it is more difficult."
Wien, who served as U.S. strategist at Morgan Stanley for 21 years before moving to Blackstone, and Doll, who was president of Merrill Lynch Investment Management before it merged into BlackRock, have made their annual predictions a widely anticipated event on Wall Street.
So have others, like Goldman Sachs Asset Management's James O'Neill and former Merrill Lynch strategist Richard Bernstein, who now runs a self-named investment management firm.
COIN TOSS?
But despite their experience and pedigrees, Wall Street gurus are wrong as often as they are right.
CXO Advisory Group LLC, a research firm that tracks more than 60 market "gurus," calculated the average forecaster is accurate only 48 percent of the time -- roughly the same odds as a coin toss.
"You might find them interesting for other reasons, but I wouldn't put much stock in their predictions," CXO Chief Executive Steve LeCompte said.
(To see some of the best and worst market gurus as graded by CXO, click on: link.reuters.com/buk85s)
The Federal Reserve Bank of Philadelphia's Livingston Survey, which summarizes economist forecasts, came within seven points of the year-end close of the S&P 500 once in the past six years -- essentially spot on.
But it has also been off by more than 60 points three times and, in 2008, when the banking system nearly collapsed, it was off by 147 points, or 9 percent, from the actual close.
Last year the survey predicted a close of 1298.5 points, which was 41 points, or 3 percent higher, than the actual close. The S&P 500 was flat for the year.
"I think forecasting has always been hard, but the market's volatility has made it a bit harder," said Tom Stark, who oversees the Philly Fed survey.
Wien last week told Reuters that over the years his forecasts have panned out about half the time. Lately, though, Wien has been wrong more often: in 2010, only two and a half of his 10 annual predictions came true.
He rightly said President Obama would endorse legislation favoring nuclear energy and that financial services regulatory reform would be softer on Wall Street than originally feared.
"Secular trends are much more fragile than they used to be, and that has made forecasting much more difficult," said Wien,
"Who would have predicted the Arab Spring? That took everyone by surprise," he said, referring to a wave of protests that toppled rulers in Africa and the Middle East last year.
Wien was five for 10 in his 2011 predictions, including four predictions that were "partially correct."
For example, he said the price of corn would reach $8.00, while wheat and soybeans would hit $10.00 and $16.00 respectively. Corn did hit the $8.00 mark during 2011, but soybeans and wheat fell short.
LATEST PREDICTIONS
Wien's predictions for 2012 include his view that U.S. company earnings will push the S&P 500 up 11 percent, Syria's Bashar al-Assad will lose power, and that the U.S. Congress will finally come together and tackle the deficit.
These forecasts are not a blueprint for investors, Wien said, but "are designed to get people thinking about some issues they might not be thinking about."
Doll predicts the European debt crisis will begin to ease, that the U.S. economy will muddle through and that U.S. Treasury rates will rebound.
Over the past 10 years, Doll said he has been right between 70 percent to 80 percent of the time. Among his seven right predictions in 2010, he said U.S. economic growth would exceed 3 percent.
For 2011, Doll predicted accelerating economic growth, double-digit stock growth, 3 million new jobs and a record high for corporate earnings. While fourth-quarter results are pending, the S&P 500 is on pace to set a new high in earnings.
But his S&P 500 forecast was too optimistic by 100 points, growth slowed in 2011 and by November only 1.45 million new jobs had been created.
Doll on Thursday said that his forecasts are intended to help organize the way investors assess the markets.
"I don't have a monopoly on right answers," he said. "Hopefully I have a perspective that can add some value to people as they think through what they need to do."
CXO Advisors, which gives Doll an above-average accuracy rating of 54 percent, says his predictions focus on broad trends but are light on specifics.
"It is relatively difficult to assess the accuracy of Mr. Doll's market projections because of conditionalities and vagueness," the firm said.
(Editing by Jennifer Merritt and Walden Siew)
Blackstone Vice Chairman Byron Wien, among Wall Street's best known prognosticators, on Tuesday unveiled his latest crop of 10 "surprises" for the coming year, such as oil prices plunging to $65 a barrel. BlackRock equity strategist Bob Doll foresees double-digit U.S. stock returns, though corporate earnings growth could lag expectations. And one well-known forecaster declared 2012 too hard to predict.
In the past -- before U.S. housing prices fell and kept falling for the first time since the Depression or the future of Euro zone was at risk -- educated guesses by these and other veteran market-watchers had a good chance of being right.
But these days, volatility is the norm and far-flung political events can send U.S. markets into a tailspin. Skeptics contend it is hard to predict what the world will look like tomorrow, let alone 12 months from now.
That led Birinyi Associates' Laszlo Birinyi, whose stock market forecasts were widely followed, to tell clients he would not be making predictions this year.
"There are too many variables which are beyond our comprehension," he wrote in a client newsletter.
Even Wien and Doll acknowledge this annual exercise has grown more difficult in recent years, as unpredictable events -- like an earthquake and tsunami in Japan, the near collapse of the euro zone and political upheaval in the Arab world -- throw Wall Street's best-known seers for a loop.
PIMCO's Bill Gross, the manager of the world's largest bond fund, kicked off 2012 saying the "new normal" of slow growth has given way to the "paranormal," an environment characterized by credit risk and "zero-bound" interest rates.
Forecasting has become "especially precarious," Doll wrote in his 2012 outlook note for clients.
Speaking to Reuters after a press briefing to review his 2012 outlook, Doll said it used to be simpler to choose between stocks or to recommend sectors of the economy, "but when it's the macro environment driving so many of these things, I do think it is more difficult."
Wien, who served as U.S. strategist at Morgan Stanley for 21 years before moving to Blackstone, and Doll, who was president of Merrill Lynch Investment Management before it merged into BlackRock, have made their annual predictions a widely anticipated event on Wall Street.
So have others, like Goldman Sachs Asset Management's James O'Neill and former Merrill Lynch strategist Richard Bernstein, who now runs a self-named investment management firm.
COIN TOSS?
But despite their experience and pedigrees, Wall Street gurus are wrong as often as they are right.
CXO Advisory Group LLC, a research firm that tracks more than 60 market "gurus," calculated the average forecaster is accurate only 48 percent of the time -- roughly the same odds as a coin toss.
"You might find them interesting for other reasons, but I wouldn't put much stock in their predictions," CXO Chief Executive Steve LeCompte said.
(To see some of the best and worst market gurus as graded by CXO, click on: link.reuters.com/buk85s)
The Federal Reserve Bank of Philadelphia's Livingston Survey, which summarizes economist forecasts, came within seven points of the year-end close of the S&P 500 once in the past six years -- essentially spot on.
But it has also been off by more than 60 points three times and, in 2008, when the banking system nearly collapsed, it was off by 147 points, or 9 percent, from the actual close.
Last year the survey predicted a close of 1298.5 points, which was 41 points, or 3 percent higher, than the actual close. The S&P 500 was flat for the year.
"I think forecasting has always been hard, but the market's volatility has made it a bit harder," said Tom Stark, who oversees the Philly Fed survey.
Wien last week told Reuters that over the years his forecasts have panned out about half the time. Lately, though, Wien has been wrong more often: in 2010, only two and a half of his 10 annual predictions came true.
He rightly said President Obama would endorse legislation favoring nuclear energy and that financial services regulatory reform would be softer on Wall Street than originally feared.
"Secular trends are much more fragile than they used to be, and that has made forecasting much more difficult," said Wien,
"Who would have predicted the Arab Spring? That took everyone by surprise," he said, referring to a wave of protests that toppled rulers in Africa and the Middle East last year.
Wien was five for 10 in his 2011 predictions, including four predictions that were "partially correct."
For example, he said the price of corn would reach $8.00, while wheat and soybeans would hit $10.00 and $16.00 respectively. Corn did hit the $8.00 mark during 2011, but soybeans and wheat fell short.
LATEST PREDICTIONS
Wien's predictions for 2012 include his view that U.S. company earnings will push the S&P 500 up 11 percent, Syria's Bashar al-Assad will lose power, and that the U.S. Congress will finally come together and tackle the deficit.
These forecasts are not a blueprint for investors, Wien said, but "are designed to get people thinking about some issues they might not be thinking about."
Doll predicts the European debt crisis will begin to ease, that the U.S. economy will muddle through and that U.S. Treasury rates will rebound.
Over the past 10 years, Doll said he has been right between 70 percent to 80 percent of the time. Among his seven right predictions in 2010, he said U.S. economic growth would exceed 3 percent.
For 2011, Doll predicted accelerating economic growth, double-digit stock growth, 3 million new jobs and a record high for corporate earnings. While fourth-quarter results are pending, the S&P 500 is on pace to set a new high in earnings.
But his S&P 500 forecast was too optimistic by 100 points, growth slowed in 2011 and by November only 1.45 million new jobs had been created.
Doll on Thursday said that his forecasts are intended to help organize the way investors assess the markets.
"I don't have a monopoly on right answers," he said. "Hopefully I have a perspective that can add some value to people as they think through what they need to do."
CXO Advisors, which gives Doll an above-average accuracy rating of 54 percent, says his predictions focus on broad trends but are light on specifics.
"It is relatively difficult to assess the accuracy of Mr. Doll's market projections because of conditionalities and vagueness," the firm said.
(Editing by Jennifer Merritt and Walden Siew)
Subscribe to:
Posts (Atom)