Not Wrong, Just Early

When a prediction about the stock market fails to come to fruition, a timeless excuse is that the prognosticator was "not wrong, just early;" the implication being that the predicted event will eventually occur. But, as Michael Aronstein of Marketfield Asset Management contends, being early is just another way of being wrong.

Aronstein eloquently explains: "Popular media presents an endless stream of heroic commentators who 'called'...every great market dislocation since the 1929 crash. What is never mentioned is that these calls were generally three or four years before the actual event and thus useless in application. By the time such a long-touted event unfolds (if ever), the narrative behind the opinion has been so fully discredited by poor performance that clients have moved their assets elsewhere and the manager has become emotionally impaired."

Aronstein claims that if you are wrong for too long, the lagging investment returns during that time limits any value that may arise when you are eventually proved correct.

For example, after the Federal Reserve Bank engaged in radical actions to expand the money supply to combat the financial crisis of 2008-09, most experts predicted that this would lead to inflation. Making investment decisions based on such fears would have led to sub-par results since inflation has yet to occur in any significant way as of now.

Going off on a slight tangent, Aronstein exhibits skepticism as to Federal Reserve Bank's ability to both forecast the future and make reasonable policy decisions in light of these beliefs.

The argument goes that the Fed is a bureaucracy and a large group of people require an immense amount of data as evidence before making a decision. By the time sufficient information is amassed to make a policy change, the events that led to the action have already passed. Aronstein claims that the major moves enacted by the Fed have occurred one-to-two years after the market has already made an adjustment. Thus, basing investment decisions on the behavior of the Fed is something of a fool's errand.

This may be true. But major actions taken by the Fed will likely lead to significant consequences down the road. The problem is knowing the exact implications of such actions and how far down the road it will be before the impact occurs.

Words of Wisdom

I don't even have a savings account because I don't know my mom's maiden name, and apparently that's the key to the whole thing. -- Paula Poundstone