3 reasons to ignore all these 'correction' calls

Stocks set record highs last week, and just days later, after some rough waters, here come the Pundits of Doom.

Sure enough, Marc Faber checked in from Istanbul to predict a crash that would be even more painful than the 22% one day-drop of 1987. “There is a colossal bubble in all asset prices and eventually it will burst,” Faber told CNBC. “Maybe it has begun to burst already.”

Or maybe not. Faber concedes that he was wrong when he said much the same thing in May. He was also wrong in August of 2013 when the S&P 500 stood at 1,408. Faber was really early in 2012 when he warned that a move of over 1,422 in the S&P would lead to an 87-style crash in the second half of that year.

Anyone who’s been in media long enough has embarrassing moments that live forever; they simply stick to some of us more than others. There’s also a distinction to be made between making an idiot out of yourself (see: Car People) and scaring the hell out of investors for personal glory and enrichment.

In the attached clip, Barry Ritholtz of Ritholtz Wealth Management questions the entire sub-industry of calling crashes. “There’s always a correction coming,” he reasons, “but what good is calling for a correction going to do anybody? What makes anyone think they’re going to get it right and have the temerity to get back in at the right point? How is that net-net after cost and taxes worth the exercise to avoid a 5%, 10% or even 15% draw down?”

The answer is that crash calls seldom profit anyone except the person making them, and that’s coming from someone who threatened to break into viewers’ homes and sell their bank stocks in early September of 2008. In all but the most extreme circumstances, predicting a crash is an act of reckless endangerment. Good pundits do it once or perhaps twice in a career. Hacks do it annually.

Here are three reasons you’re better off ignoring the doomsday crowd:

1. The timing is all but impossible

Being “early” is the same as being wrong, and when it comes to your investments, being wrong is a huge problem. Legions of investors have sat out the past five years, terrified of a repeat of the financial meltdown. While they waited, the stock market rallied more than 120%.

Remember, this is a two-part trade. You have to first sell at the right time, then either buy back in or cover your shorts. If you get either side of the trade wrong, you lose. If stocks dropped 22% right now, the S&P 500 would be in the mid-1,500’s and Faber would be proclaimed an investing god despite being down on a net basis.

The vast, vast majority of the time, markets behave within reasonable price ranges. Betting on a crash is like putting all your money in lotto tickets: you could be right, but at what risk?

2. Selective perception colors all your investing

As Ritholtz writes about in his blog, once the mind gets locked on a predicted outcome, it tends to see supporting evidence everywhere. Every empty hotel becomes a negative economic tell. Faber says the market will crash because Obama is a bad president and the Fed is “clueless.” Those are largely independent statements disguised as an argument solely to support a conclusion that’s already been made.

That’s no way to plan your retirement.

3. It’s not actionable

To Ritholtz’s earlier point, even if you nailed the timing of a downturn call, you’re still facing a litany of fees and expenses to act on the prediction. Yes, there are huge profits to be made for those fortunate souls who get the trade just right, but the odds are stacked massively against individuals doing it.

For every person who claims to have nailed the 1987 crash or seen the financial meltdown of 2008 coming, there are dozens who went bust trying to short it. Plenty of people saw those events coming just as there are scores of pundits who will claim to have predicted the next downturn after the fact. It’s a much less laudable accomplishment than most people would have you believe.

So what do you do? In a word, less. For patient investors, the answer is to stick to a long-term plan while being fully aware of the risk that a correction or even a crash could be imminent. “If you can’t withstand a 20% draw down, then put all your money in treasuries and don’t worry about it," Ritholtz suggests. "If you’re going to be in equities, which careen wildly over long periods of time, you have to mentally anticipate there are going to be swings."

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