Read This Article or You Will Die Penniless!

by Daniel Putnam | August 11, 2013 10:30 am

Read This Article or You Will Die Penniless!

“Individual Investor Maintains a Conservative, Buy-and-Hold Approach”

That’s a headline you’ll never see anywhere in the financial media. Why? Because we all want is clicks, and that’s because clicks drive revenues.

This, more so than merit, is the reason why Marc Faber’s most recent warning of a coming “1987-style” stock market crash[1] was splashed across the headlines last week. On Thursday and Friday, CNBC and CBS Marketwatch, among others, featured Faber’s call among their leading headlines in large, bold type.

What better way to drive pageviews on a slow August weekday?

Unfortunately, the media’s practice of giving extra attention to doomsday prophecies is nothing new. Pundits learned long ago that the best way to get their names in print is to predict a catastrophe. And if they’re proven correct, all the better. More wizened investors might recall that some people made their careers by predicting the 1987 crash, including Elaine Garzarelli and to some extent, Faber himself.

This isn’t meant to take anything away from Faber specifically. His annual Barron’s Roundtable discussions are a must-read — who else would recommend investments such as Vietnamese real estate? — and he certainly has more experience, not to mention a larger bank account, than the average financial journalist.

Instead, the problem is that the media continues to provide a forum for such predictions, which can frighten less-experienced individual investors into making bad decisions.

Further, these predictions often are presented without any mention of the track record of the person making the call, which would enable the average reader to assess whether the “crash” prediction is new or — as is the case with Faber[2] — one in a longer pattern of calling for major downturns.

As a result, individual investors would be better served by considering the motivations of the parties involved — to wit: pageviews, attention, fanfare and the attendant cash flows that come with these three items — rather than giving too much credence to the predictions themselves.

One reason for this is that while crashes do indeed happen, and in fact have happened three times since 1980 (in 1987, 2000-02, and 2008), they still are relatively rare. What’s more, the S&P 500 has produced an average annual total return of more than 12% in that time period. What would have produced the better result during that time period — a simple buy-and-hold approach or attempting to call major tops, which on average occurred about once every 11 years?

Finally, the phrase “1987-style” is in itself a loaded term that conjures grainy images of traders with their heads in their hands, and — for some of us — watching the damage unfold on the old FNN. (That’s the Financial News Network, for you youngsters).

djia19802000s 283x300 Read This Article or You Will Die Penniless!
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However, the reality is that the 1987 downturn was the ultimate black swan in that it was essentially a one-day event. Although the S&P 500 fell more than 20% on Oct. 19 (Black Monday), it closed higher the next day and — beginning in December — began the march higher that enabled it to recoup its losses within two years.

On a 20-year chart of the Dow Jones Industrial Average from 1980-1999, the ’87 crash barely registers:

The Bottom Line

This bull market is going to continue indefinitely, especially if the Fed elects to take its foot off of the gas pedal. Still, weaker market conditions are a vastly different animal from headline-grabbing predictions about the next “crash.”

Just don’t expect the financial media to begin making that distinction anytime soon.

Endnotes:
  1. coming “1987-style” stock market crash: http://www.cnbc.com/id/100950234
  2. as is the case with Faber: http://slant.investorplace.com/2013/08/marc-faber-bear-market/

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