It is exceedingly difficult to make predictions, particularly about the future. –Niels Bohr (1885-1962), Danish physicist
As we approach the end of 2012 and contemplate the future direction of stock and bond markets as well as the value of many commodities it reminds us that it is sometimes difficult to separate the comments from the talking heads that dominate the network and financial news shows and the predictions of economic and political pundits from the deeper currents that shape the eventual long run outcomes. It is tempting and usually engaging to listen to these experts as they prognosticate with such confidence that it begins to wear down the barriers of cynicism.
Twenty-five years ago this month one such expert almost became a household name by correctly predicting the 1987 crash. Elaine Garzarelli was a quantitative based analyst and money manager working for Shearson Lehman when she appeared on CNN on October 12, 1987 and predicted an imminent collapse. In a small article printed seven years later, an October 27, 1994 edition of The New York Times stated, “That [prediction] came not long after she had begun a mutual fund, and money soon poured into it. But its performance never matched the publicity, and the fund was quietly merged with another earlier this year.” Further, Ms. Garzarelli was “ousted” shortly thereafter. Importantly, as illustrated in the chart to the right, although the collapse erased a couple years of appreciation, the market was hitting new highs within two years subsequent to the collapse. While it was a major event, patient investors were rewarded by not reacting to the media frenzy that ensued. In the end, even a broken clock is right twice a day.
Reaching further back, 50 years ago this month, the United States was in the midst of the Cuban Missile Crisis. It is probably difficult for younger people to fully appreciate the Cold War and the effects it had on people’s outlook for the future.
At the height of the crisis on October 23rd, combined with other events in 1962, the S&P500 was down 25% for the year as indicated at left. Again, the crisis passed and the market appreciated nicely rewarding persistent investors for more than three years before the next bear market in 1966.
Those who have knowledge, don’t predict. Those who predict, don’t have knowledge. –Lao Tzu, 6th Century BC Chinese Poet