Tune Out the Seers

Predictions by "experts" are often funny -- and not just because they're usually wrong. Despite centuries of proven incompetence, would-be seers retain a remarkable ability to influence investors and lighten their wallets. John Kenneth Galbraith had it right when he said, "There are two kinds of forecasters. Those who don't know and those who don't know that they don't know."

When Ravi Batra's predictive powers proved limited in The Great Depression of 1990, he simply returned with a new book and a different date. In 1999, he published The Crash of the Millennium: Surviving the Coming Inflationary Depression. Wrong again. His partisan in pessimism Robert Prechter has been predicting a deflationary depression for decades, most recently in a 2002 book.

In the U.S., there is no shame in making predictions that prove atrociously off the mark. It seems you even get some kind of wacko street cred if you stick to your guns -- no matter what the facts dictate. Indeed, refusing to predict might be a career-ender for people in certain jobs -- consider the chattering strategists you see on TV.

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Brilliant investors with fabulous records, such as Warren Buffett and Peter Lynch, say trying to forecast the economy is a waste of time. But when a talking head does so, we tend to listen -- just like people in the old E.F. Hutton commercials.

Stick to your plan. When someone as renowned as George Soros says we are in the worst financial crisis since World War II, shouldn't you pay attention? Yes, sort of. But that doesn't mean you should abandon a carefully crafted long-term investment plan. If you sold every time a famous rich guy got the heebie-jeebies, you'd have a lousy record. Besides, Soros isn't shorting the world. His hedge funds hold large positions in Chinese and Indian stocks. Maybe he doesn't really think the sky is falling after all.

So how should you react to predictions? You could ignore almost all of them. You absolutely should ignore all perma-bears, such as David Tice, and all perma-bulls, such as Goldman Sachs's Abby Joseph Cohen (for more on Tice, see Bear Market Insurance). And you should avoid being seduced by one-hit wonders, such as Elaine Garzarelli, who called the 1987 crash. Her record since then has left much to be desired.

What, then, should you care about? First, actions speak more loudly than words. Warren Buffett has been buying stocks with a vengeance for more than a year. I care about that.Second, you should pay heed to rigorous analysis by someone you respect. One person I respect is Bob Rodriguez, manager of FPA Capital and New Income funds. He was early to insist that the subprime mess would become a con-tagion.

Rodriguez's speech on June 28, 2007, called "Absence of Fear," is a landmark of brilliant financial forecasting. First, he proved that soaring housing prices represented "a bubble of massive proportions" whose popping would claim casualties throughout the financial system. As far back as 2005, Rodriguez said, he had sold many mortgage securities because he noticed that homeowners with good credit ratings and near-prime loans were defaulting at frightening rates after only nine months of ownership. He described how mortgage loans had become increasingly speculative and showed that prices of many complex mortgage securities would crumble, despite high grades from the rating agencies, if housing prices fell even a little.

I listened and largely avoided financials -- and shorted some -- in 2007. Why did I heed Rodriguez and not others, such as Fed chief Ben Bernanke? Because Rodriguez's analysis and bond-market insights were original and compelling, and his results were too good to ignore.

For the record, Rodriguez is still bearish and has 40% of his stock fund's assets in cash. And that makes me nervous.

Columnist Andrew Feinberg writes about the choices and challenges facing individual investors.