The Myth of Expert Advice - Part 1

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A selling frenzy shook the stock market on the morning of Wednesday, January 7, 1981. Immediately following the familiar sound of the opening bell that officially starts the hectic business day on Wall Street, trading volume soared to record highs as stocks plummeted to alarming lows. By the end of the day a record 92 million shares had been traded on the New York Stock Exchange, and the Dow Jones Industrial Average (NYSEArca: DIA) fell more than 2%. Stocks fell an additional 1.5% the following day. 

Such sell-offs are usually the result of global upheaval or in­ternational tragedy of some measure, such as the outbreak of war or the death of a president. On that day in 1981 it was the result of a phone call. To be specific...three thousand phone calls.

The calls were made to wealthy clients all over the world - on vacation in the Carib­bean, in their penthouses overlooking Manhattan, or skiing in the Alps. These people all had one common bond. They had each paid $750 to subscribe to Joseph Granville's "Early Warning Ser­vice." [i] Their subscription enti­tled them to receive a telephone call or telex alerting them to the seer's latest prognostication. Late on the night of January 6 and into the early morning hours of January 7, Gran­ville's staff of 34 called to wake their clients with the simple message, "Sell everything.  Market top has been reached. Go short on stocks having sharpest advances since April." By 2:45 that morning, Eastern Time, the calls were completed.

The market's reaction was a testament to the clout of Joe Gran­ville. His influence had been building over the prior six years as his Granville Market Letter grew its subscriber count to more than 13,000. But his reach extended well beyond that number, as each market call he made was met with ever-greater news media coverage.

The news media and Granville's subscribers weren't the only ones enamored by his market calls. So was Granville him­self. A 1981 Peo­ple magazine article quoted him as saying "I will never make a seri­ous mistake in the stock market again." [ii] Having mastered the market, Granville expanded into truly Nostradamus-level predictions. At a seminar in Vancouver, British Columbia in early 1981, Granville an­nounced that he had adapted his stock market forecasting system to predict earthquakes. He specifically predicted that an earthquake would "shred" California 23 miles east of Los Angeles. He knew this, he said, because he developed and followed 33 earthquake indicators. [iii] Alas, his skill fell far short of his self-confidence and massive ego. There was no earthquake. That blunder, along with errant predictions the prior year that both San Francisco and Santa Barbara would be hit with temblors, [iv] began to shake the public's confidence in Granville's prog­nosti­cation abilities.

Those "not-even-close" misses also marked the peak in Gran­ville's fame. Over the fol­lowing decades, his popularity collapsed along with the accu­racy of his pre­dictions.   The Hul­bert Financial Digest tracks the perform­ance of market gurus, such as Granville, by re­cording each of their buy and sell rec­ommendations. In 2005, Mark Hul­bert stated that the Gran­ville Market Letter "is at the bottom of the Hulbert Fi­nan­cial Di­gest's rankings for per­formance over the past 25 years - having produced average losses of more than 20% per year on an an­nualized ba­sis." [v] His subscribers paid far more than $750 per year to follow his advice.

The December 20, 2007 issue of BusinessWeek (since purchased by Bloomberg L.P. and renamed Bloomberg Businessweek) con­tained an article titled "Where to Put Your Cash in 2008." [vi]   In the article, Businessweek polled seven well-known stock market analysts about their views on the direction of the stock market during 2008. As we all know now, 2008 proved to be one of the most calamitous years on record for the world's stock markets; $30 trillion in value was wiped out from the world's equity markets during the year. The S&P 500 fell 38%, which actually ranked it among the better performing mar­kets. The MSCI Emerging Markets Index (NYSEArca: EEM) fell 54% and the MSCI World Index ( IND ) fell 42%.

Yet in the BusinessWeek article, every analyst predicted higher stock market prices for 2008. On average they predicted a 12.76% rise in the Dow Jones Industrials and a 12.61% rise in the S&P 500 (NYSEArca: SPY). Perhaps even more interesting was the fact that their predictions varied by very little among themselves. Their forecasts for the Dow Jones Industrials (NYSEArca: DIA) ranged from a gain of +8.56% to +15.35%. They were in consensus on their forecasts. At least they could take comfort in being wrong to­gether.

So you clearly can't rely on "experts" to help you buy and sell the "market." But why is it that experts, people who make it their job to un­der­stand and forecast markets or events, can get it so wrong? Are they trying to do too much by predicting the movement of an entire market? Per­haps they would do better with more limited predictions, such as the earnings of individual companies. Un­fortunately, wrong again. We'll show why in Part 2 of "The Myth of Expert Advice".  Stay tuned.

This article is excerpted from Myth #13 of " Jackass Investing:  Don't do it.  Profit from it. " by Michael Dever.  

About the Authors:

Michael Dever is the CEO and Director of Research for Brandywine Asset Management, an investment firm he founded in 1982.  He is also the author of " Jackass Investing:  Don't do it. Profit from it.", which is the Amazon Kindle #1 best-seller in the mutual fund and futures categories.  John Uebler is a Research Associate for Brandywine Asset Management.  Please visit www.brandywine.com and www.jackassinvesting.com


[i] Edward E. Scharf and John Thompkins, "Granville Stuns the Market," Time Magazine (January 19, 1981).

[ii] Kristin McMurran, "When Joe Granville Speaks, Small Wonder That the Market Yo-Yos and Tickers Fibrillate," People Magazine , Vol. 15, No. 13 (April 6, 1981).

[iii] McMurran. "When Joe Granville Speaks, Small Wonder That the Market Yo-Yos and Tickers Fibrillate."

[iv] Craig Unger, "Good-bye to L.A. Says Market Wiz," New York Magazine (May 12, 1980): 16.

[v] Mark Hulbert, "Gambling on Granville," MarketWatch (March 16, 2005). Retrieved February 14, 2011.

[vi] William Greiner, "Where to Put Your Cash in 2008," Bloomberg Businessweek (December 20, 2007).



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

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