An interesting column by Michael Cembalest, Head of Market Analysis and Investment Strategies at J. P. Morgan Asset Management, on well-known alarmists from the investment and scientific community came out on November 12. Who are the alarmists? Those who endlessly shout: «Wolves, wolves!». Well, or, since we are talking about the markets: «Bears, bears!»
The author notes that the number of apocalyptic forecasts after the 2008 crisis has grown significantly. He explains this by well-known behavioral factors. The relatively recent crisis leads people to attribute a greater likelihood of a possible recurrence of the crisis (recency bias). Plus, bad news and predictions sell well. Living beings have an instinct for self-preservation — attention to negative information (for example, about danger) increases the chances of survival in the animal kingdom.
This feature is loved to be exploited by the media: it is well known that a «horrifying» headline or magazine cover provokes the interest of readers — this is confirmed by real experiments. For example, in an experiment, a regional newspaper quickly lost two-thirds of its readership by refusing to print bad news.
M. Kembalist not only drew attention to the growth of negative forecasts, but also assessed the possible consequences for investors who used such forecasts in the investment process. For example, the opportunity costs of investors who followed the advice of a guru in 2014 and switched from stocks to bonds would have amounted to more than 40% (among the predictors were famous and professional people: Simon Johnson, Paul Krugman, Karl Icahn, Mark Faber and a lot others). Naturally, the greatest harm to investors could be predictably inflicted by Nouriel Roubini: following his advice would lead to a lost yield of only 60%! Jeff Gundlach, the new Bonded King from DoubleLine, is stepping on his heels.
Of course, a crisis will happen someday — no one doubts it. Markets are designed so that any imbalances that arise are corrected sooner or later. And people will continue to listen to blood-curdling predictions. But what is the result? Investors who listen to the advice of gurus stay out of the market in good times and deprive themselves of a safety cushion in bad times that even the smartest of the human race systematically fails to predict.
What can you oppose to those who like to play on the nerves of investors?
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