What They Do...
...(and who they do it to).
A recent TBL looked at bad forecasts, which are legion. This one will begin with why such forecasts continue to be so prominent, especially on Wall Street.
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What They Do
Josh Brown’s fine book, Backstage Wall Street, does an excellent job illuminating what Wall Street wants to hide from clients and investors. Like the Wizard in The Wizard of Oz, the Street would have us pay no attention to what is really there – “behind the curtain.” Yet, once in a great while, the Street rats itself out so that we get to find out, without a shadow of doubt (if we still had any), what the big investment houses really think about what they do and who they do it to.
It isn’t pretty.
The now-defunct Bear Stearns won a noteworthy 2002 litigation involving former Fed Governor and then-Bear Chief Economist Wayne Angell over advice he and the firm gave to a Bear Stearns client named Count Henryk de Kwiatowski (really) after the Count lost hundreds of millions of dollars (really) following that advice (back story here). The jury awarded a huge verdict to the Count but the appellate court reversed. The appeals court held that brokers may not be held liable for honest opinions that turn out to be wrong when providing advice on non-discretionary accounts.
That’s a justifiable decision, especially in a world where brokers are not fiduciaries.
Yet, for our purposes herein, I’m not primarily interested in the main story, fascinating as it is. Instead, I’m struck by a line of testimony offered at trial by the then-Bear CEO, the late Jimmy Cayne. Cayne apparently thought that his firm could be in trouble, so he took a creative and disarmingly honest position given how aggressive Bear was in promoting Angell’s alleged expertise. Cayne brazenly asserted that Angell was merely an “entertainer” whose advice should never give rise to liability.
Economists are right only 35-to-40 percent of the time, Cayne testified. “They don’t really have a good record as far as predicting the future,” he said. “I think that it is entertainment, but he probably doesn’t think it is.” That isn’t far off, as my forecasting pieces routinely show (see here, for example). Somehow, however, I doubt the Count was entertained. Or amused.
Cayne even noted that Angell did not have a real job description at Bear. “I don’t know how he spends most of his time,” testified Cayne. “He travels a lot and visits people and has lunches and dinners, and he is an entertainer.”
Notice that Cayne did not even pay lip service to the idea that clients were entitled to the firm’s best efforts based upon the best research (or even their best research). Moreover, he did not seem to think that the Count deserved honesty together with competent advice. For Cayne, the goal was simply to be entertaining so as to make sales. That the Count lost hundreds of millions of dollars was merely collateral damage (and not even necessarily unfortunate at that).
To look at the Count’s case a bit differently, in an odd sense, Cayne was precisely if hypocritically correct. As both Josh and I have noted before, we’re in the Wall Street “silly season” of predictions and forecasts for the New Year. There is nothing inherently wrong with them, and they can be very (yes) entertaining and, once in a while, illuminating. But you shouldn’t take them any more seriously than Jimmy Cayne did.
As Wharton’s Philip Tetlock told Tyler Cowen: “We want a lot of things from our forecasters, and accuracy is often not the first thing. We look to forecasters for ideological reassurance, we look to forecasters for entertainment [there’s that word again], and we look to forecasters for minimizing regret functions of various sorts.” Barry Ritholz is more direct: “All forecasts are marketing.”
Both are correct.
And you should always be aware of who has (and especially who doesn’t have) your best interest in mind – practically, realistically, and legally.
Still, forecasting (of a sort) is a necessary thing.
We may be lousy at market forecasts (and we are), but the idea that we can live our investing lives forecast-free is as erroneous as the market predictions that are so easy to mock. As Cullen Roche has emphasized, “any decision about the future involves an implicit forecast about future outcomes.” As Tetlock wrote: “We are all forecasters. When we think about changing jobs, getting married, buying a home, making an investment, launching a product, or retiring, we decide based on how we expect the future to unfold.”
It’s a grand conundrum for the world of finance. We desperately need to make forecasts to succeed but we are remarkably poor at doing so. What should we do with that knowledge?
Most of the time, at least, we should play the probabilities.
Warren Buffett, perhaps the world’s greatest investor, buys stocks and holds them. His “favorite holding period is forever.” The typical investor … not so much.
If you don’t want to invest in equities because you fear a market downturn, then you shouldn’t be in equities. However, you must also recognize that, if you avoid stocks, you will almost certainly end up with a lot less money and, the longer you live, the difference between what you have and what you could have had will compound ... a lot. That’s risky, too, albeit a different sort of risk.
All of which raises what is likely the crucial question in this regard: Are you a long-term investor?
Truly being a long-term investor is difficult because the long-term feels like an eternity in the moment. As the late, great Daniel Kahneman has explained, “the long-term is not where life is lived.”
Wall Street’s business model is designed to get you to put your money in motion – early and often – even though time is perhaps the one true advantage retail investors have in the market.1
Source: JP Morgan Asset Management
Historically, almost 54 percent of individual trading days are positive — just over half. In 2024, it was almost 57 percent. On an annual basis, it’s nearly three-quarters of the time. A holding period of two-years has been positive over 80 percent of the time. At just over five years, the probability reaches 90 percent. And after 15 years, historically (in the U.S.), all returns have been positive. The longer the holding period, the more likely the outcome is to be positive.
To be clear, none of this is cast in stone. Just because something has always worked doesn’t mean it always will. The worst that has ever happened isn’t a limit on what can happen. Things can always get worse. Past performance is not indicative of future results. If you doubt me, ask Japanese investors how “stocks for the long run” has performed for them, or ask risk managers how VaR worked for them during the Great Financial Crisis.
It should also be noted that the perma-bears could (finally) be right. A market crash might be imminent.
But that’s not the way any of us who are long-term investors should bet. The probabilities favor investment, especially for long-term investors. By a lot.
Source: JP Morgan Asset Management
Our brains all echo with fearful thoughts, whispers, and imprecations. For most of us, most of the time, we’d do well to ignore them about our investment choices. Instead, we should listen to the Christmas angel, even though Christmas is over, and “fear not.”
In the near term, markets act as a voting machine, subject to the emotions, whims, and headlines of the moment. Over longer periods, markets act as a weighing machine, separating reality from fantasy. Ultimately, reality wins.
The U.S. stock market is a call option on American ingenuity, innovation, and human resiliency. And it’s highly dangerous to bet against America.
Totally Worth It
We’ve always known that Ringo Starr loved country music (“Act Naturally” was made famous by Buck Owens before Ringo sang it on Help!; the country influence on Rubber Soul’s “What Goes On,” and his solo composition for the White Album, “Don’t Pass Me By,” are obvious), but I was still surprised by his new release of a Nashville-inspired country album, Look Up. Collaborators include Molly Tuttle, Larkin Poe, and the iconic Alison Krauss. The perennially underrated 84-year-old Beatle has still got it.
Feel free to contact me via rpseawright [at] gmail [dot] com or on Twitter (@rpseawright) and let me know what you like, what you don’t like, what you’d like to see changed, and what you’d add. Praise, condemnation, and feedback are always welcome.
This past week, a “manufacturing error” caused a donut shortage at Dunkin’ locations in Nebraska and New Mexico. My heart goes out to all the local law enforcement officials navigating this difficult time.
Despite developing a remarkable new technology and selling millions of doses of vaccines utilizing it, Moderna shares were down more than 15 percent in premarket trading on Monday, reaching their lowest level since April 2020 – right after the start of the global pandemic. Zoom has disappointed, too. Its all-time high was $568.34 on October 19, 2020. In 2022, ARK’s bear case was $700. It traded this week at about $80.
Squeezing 2,000 lemons a day was such a pain for staff at Chick-fil-A Inc. that the company enlisted an army of robots to do it.
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This is the best thing I’ve read recently. The scariest, unless it’s this. The sweetest. The most sensible. The most intriguing. The most romantic. The best thread. True Crime. RIP, Heinz Kluetmeier. RIP, Mr. Baseball.
Please send me your nominations for this space to rpseawright [at] gmail [dot] com or via Twitter (@rpseawright).
I loved the Smothers Brothers as a kid, and watched their show every week. This performance, from the show, is fantastic.
Benediction
Today’s benediction is the old gospel song, “Blessed Assurance,” sung (spectacularly and without accompaniment) by the multi-Grammy winning jazz singer, Samara Joy.
We live on “a hurtling planet,” the poet Rod Jellema informed us, “swung from a thread of light and saved by nothing but grace.” To those of us prone to wander, to those who are broken, to those who flee and fight in fear – which is every last lost one of us – there is a faith that offers love and hope. And may grace have the last word. Now and forever. Amen.
As always, thanks for reading.
Issue 182 (January 17, 2025)
Much of what is rotten in the modern world is on account of such misplaced incentives. Investors should, generally, buy and hold; Wall Street wants their money in motion. Consumers want good music; Spotify wants cheaper music, irrespective of quality. Content creators want the ability to promote their work; Twitter wants to hurt competitors. Facebook users want to post about their lives and check in on their friends; Facebook wants to push them down increasingly ugly rabbit holes, to maximize “engagement.” So-called “journalism” gives readers/viewers what they want rather than what they need to maximize readers/viewers/clicks. Citizens want results; candidates want votes. Rinse. Repeat.