Beat the Crowd. Kenneth Fisher

bringing new growth and new sources of profits. This is what the steel-nerved contrarians believed in March 2009.

      Steely contrarians also look past short-term market movement. They know daily drops, quick pullbacks and corrections are normal during bull markets, and reacting is dangerous. It usually means selling after stocks have already fallen, just when folks should hunker down and wait. Reacting to volatility is a good way to sell low, buy high.

      The same goes for seemingly big short-term events, like geopolitical earthquakes. Skirmishes, minor wars, revolutions and saber-rattling have plagued us since the dawn of civilization – terrible as they are for lives and property of those in the line of fire, they usually aren’t terrible (or even just plain bad) for stocks. Markets have dealt with conflict since before the first Dutch tulip changed hands, and only big, global and nasty conflicts, like the onset of World War II, have ever ended in bull markets. Life always goes on, and the going on is what matters.

      Check Your Ego

      As I said earlier, the contrarians know they won’t be right all the time. Perfection is impossible.

      Even a practiced contrarian should expect to be wrong fully 30 % to 40 % of the time. You needn’t be right any more than two-thirds of the time to do fine and stay ahead of the pack. Simply being right more often than wrong is huge and exceptional. As said, a professional who is right 70 % of the time in the long term becomes an absolute living legend – and had better also be used to being wrong 30 % of the time. So you should be, too.

      So how can you be right more often than wrong? I already told you: Remember markets will do whatever the herd doesn’t expect! But there are many ways to apply this simple rule. I’ll detail them. Read on!

      CHAPTER 2

      For Whom the Bell Curve Tolls

      In terms of rites and traditions, not much matches New Year’s. If you ever went on Family Feud and this category came up, you’d have a field day. Champagne toasts! “Auld Lang Syne”! Resolutions! Ryan Seacrest (Dick Clark for graybeards) counting down before a big glittery ball drops on national television!

      Here’s another: professional investors’ annual market forecasts. Will they pop up in a game show? No way. But knowing and understanding them can help you make more money than game shows ever can, assuming a 50-show Jeopardy run isn’t in your future.

      Parsing professional forecasts can also help you develop one of the most basic principles of contrarianism: thinking different, not opposite. Wall Street strategists are far more gameable than retail investors. As my old research partner Meir Statman and I found in a 2000 study for the Financial Analysts Journal, professional forecasters are wronger stronger and for longer than regular folks. Most individual investors are less stubborn and flip with trends – they won’t stand being wrong for too long before they flip. If they’re skeptical, four months of strong returns can turn them into bulls. If they’re getting optimistic, it just takes one big pullback to flip them back to skeptics. Amateurs often have less confidence in their views. As Meir and I found, when the media swings, individuals swing with them.

      The pros are more stubborn. As we wrote then:

      Individual investors and newsletter writers form their sentiments as if they expect continuations of short-term returns. High S&P 500 returns during a month make them bullish. The sentiment of Wall Street strategists is little affected by stock returns. We found no statistically significant relationship between S&P 500 returns and future changes in the sentiment of Wall Street strategists.1

      Pros don’t flip like retail investors do. Their status breeds self-confidence – they’re darned sure they know where markets are going and are willing to be patient. They don’t give up the ghost, though they do mean-revert. If their forecasts for a year are too dour, clearly behind the mark halfway through, they’ll revise them up – just a bit, and largely so they don’t look ridiculous if the market finishes up strong. Many did this in 2014, pulling up their forecasts midyear when markets had already exceeded their full-year forecast for mid-single-digit returns – interestingly, the market then moved against them, with a third-quarter “stealth correction.” That’s The Great Humiliator (TGH) in action.

      Armed with the knowledge that Wall Street pros are wronger stronger and longer – more often than not – we can game them. As we chronicled in Chapter 1, the curmudgeon posing as contrarian would say if all the pros are bullish, you should be bearish – and if they’re bearish, you should bullishly rage on. But as we’ll see, this is too black and white! Professional market gurus are wrong an awful lot, but not because the market always does the opposite of what they say. Understanding how and why they’re wrong – and why the market does what it does instead – is the first step to being right more often than wrong.

      In this chapter, we’ll cover:

      • Why most pros are mostly wrong most of the time

      • What their wrongness really tells you about what markets will and won’t do

      • Why nailing a forecast on the head isn’t important

      Wall Street’s Useless/Useful Fascination With Calendars

      Wall Street’s fascination with calendar-year return forecasts is largely foolish. Calendar-year returns don’t matter. It’s true! Market cycles are what matter, and market cycles don’t care about calendars. Rare is the bull or bear market that turns with the calendar page. No Standard & Poor’s (S&P) 500 Index bull market since 1926 began in January, and only one – 1957 through 1961 – ended in December. Maybe the next cycle aligns perfectly with the Roman calendar, or maybe it follows the lunar cycle. First time for everything! But nothing fundamentally changes when the calendar flips.

      Yet Wall Street is fascinated with calendar years, and pundits like making yearly forecasts. They get headlines and eyeballs (always a good thing for a pundit). They’re splashy and easy for readers to make heads or tails of – just a number! A very specific number for an individual index. This makes them easy to track and grade, giving the pundits the aura of accountability, even if few bother filling out their report cards and almost no one looks at report cards afterward.

      Everyone gets in on the action. The big wire houses dedicate whole teams of economists and in-house gurus to the cause. Many fund managers do it with cult-like media following. Smaller pros may do it in their quarterly reports. Bloggers and columnists commonly tell you, to the number, where they think stocks will go.

      Individually, none of these forecasts are much use to the average investor. Numerical forecasts aren’t much use for these folks’ clients, either. They’re a sideshow! A pro’s forecasting report card doesn’t determine the returns their clients receive. Performance comes down to positioning. If they’re positioned for a bull market, and it pays off for clients, that matters far more than whether they predicted 7 % or 20 % in an 18 % year.

      The trick for professional forecasts is to use them without using them. Nope, that isn’t a typo! If you collect the whole batch of professional forecasts for a year, you get a marvelous snapshot of the general direction and magnitude Wall Street expects. And that gives you a pretty good idea of what the market likely discounts and hence won’t happen.

      Wall Street pros aren’t the only ones fascinated with calendars – firms are, too! My father, Phil Fisher, always complained about this. He saw himself more as a business analyst than a stock market analyst, and he’d say publicly traded firms are way too focused on this year’s or next year’s earnings per share, always thinking in calendar years! If they were private, he said, they’d think much longer term. If they had the chance to make an investment with a sky-high return over 20 years, they’d care less about up-front costs, business cycles and the reality of short-term losses. They’d care much more about the total return at the end of those 20 years, net of all those occasional big losses.

      When a business starts a plant, the project bleeds cash – planning, architecture and construction drain capital. Businesses hyper-focused on calendar-year earnings might not take the plunge, regardless of how much it could enhance

1

“Investor Sentiment and Stock Returns,” Kenneth L. Fisher and Meir Statman, Financial Analysts Journal, March/April 2000.