Money Managers Aren’t Paid to Forecast; They’re Paid to Adapt

It seems nosotros can’t teach a calendar week without somebody predicting the terminate of the dry ground in addition to stirring upwardly everyone’s fears of a marketplace meltdown. These apocalyptic warnings are becoming routine in addition to the lamentable affair is that it does movement the prissy private investor to run for the hills in addition to liquidate their investment portfolio. Just aspect at the marketplace calls for a crash over the lastly few years:
Whenever a customer refers me to an article of somebody calling for a crash I similar to response amongst a question: How many crashes tin yous listing over the lastly century? I’m non talking virtually a 20%+ deport market, but a marketplace crash every bit defined yesteryear Investopedia:
Definition of 'Stock Market Crash'
A rapid in addition to oft unanticipated driblet inwards stock prices. H5N1 stock marketplace crash tin live the termination of major catastrophic events, economical crisis or the collapse of a long-term speculative bubble. Well-known US stock marketplace crashes include the marketplace crash of 1929 in addition to Black Mon (1987).
Think virtually that, nosotros choose had 2 existent marketplace crashes occur inwards the lastly 100 years, which industrial plant out to virtually i every 50 years. If they are hence infrequent, in addition to hence why practice nosotros hear hence much virtually them? I'll give 2 reasons: One, people oft crave attending in addition to tin easily gain it yesteryear making bold forecasts (whether they plough out wrong or not) and, two, people assign a higher probability to marketplace crashes similar a shot than they choose inwards the past.
For example, shown below is the S&P 500 along amongst a Bloomberg story count for articles that choose the words “market crash” inwards them. Since the early on 1990s, nosotros saw a spike on the 10-year anniversary of the 1987 marketplace crash, in addition to hence some other roughly the September 11th 2001 terrorist attacks, in addition to and hence i time again on the large Oct swoon of 2008. I desire to depict your attending to the starting fourth dimension 2 spikes inwards 1997 in addition to 2001 in addition to betoken out that, i time they calmed down, fears over a “market crash” returned to normal levels. However, afterward 2008, at that topographic point has been a continual in addition to ongoing spike inwards calls for a marketplace crash dissimilar anything we've seen over the prior 2 decades. 

Source: Bloomberg
This brings upwardly an of import point—a subject really—that I try to stress i time again in addition to again: To live successful every bit investors nosotros can’t fixate on the recent past, nor complain virtually what should live happening, but rather focus on what is taking house in addition to why.
I typically write i to 2 articles a twelvemonth on the bailiwick of beingness flexible in addition to desire to include an excerpt from an article I wrote dorsum inwards 2009:
All investors volition live wrong at some betoken in addition to the clit a fast i on is to acknowledge your mistake inwards judgment early on rather than beingness a broken clock that is eventually right good downwardly the road. Being wrong is human; beingness stubborn inwards the human face upwardly of changing facts is foolishness. Another pearl of wisdom summing upwardly this idea comes from famous investor Peter Bernstein who said the next afterward a long in addition to successful investment career (emphasis added):
After 28 years at this postal service in addition to 22 years earlier this inwards coin management, I tin amount upwardly whatever wisdom I choose accumulated this way: The clit a fast i on is non to live the hottest stock-picker, the winning forecaster, or the developer of the neatest model; such victories are transient. The clit a fast i on is to survive. Performing that clit a fast i on requires a strong breadbasket for beingness wrong, because nosotros are all going to live wrong to a greater extent than oft than nosotros expect. The time to come is non ours to know. But it helps to know that beingness wrong is inevitable in addition to normal, non some terrible tragedy, non some awful failing inwards reasoning, non fifty-fifty bad luck inwards most instances. Being wrong comes amongst the franchise of an activeness whose consequence depends on an unknown. Look roughly at the long-term survivors at this trouble organisation in addition to holler upwardly of the much larger seat out of colorful characters who were i time inwards the headlines, but who choose since disappeared from the scene.

Remain Bullish Until the Market in addition to Economy Undergo an "Identity Crisis"

In calorie-free of the above, it is of import non to extropolate out besides far inwards the future, but to focus on how commutation drivers of the stock marketplace in addition to economic scheme are changing on a daily, weekly, in addition to monthly basis. For example, if the bulk of stocks are inwards strong uptrends across most time-frames (as measured yesteryear curt to long moving averages), I choose to conclude the bull marketplace inwards stocks is live in addition to well. Similarly, if the mass of US states are showing increasing economical growth, it’s logical to assume the economical recovery remains inwards place. What investors must sympathise is that marketplace tops in addition to economical peaks are a procedure in addition to practice non occur overnight. Rather, at that topographic point is a menstruation of fourth dimension inwards which fewer in addition to fewer stocks participate inwards the bull marketplace in addition to fewer in addition to fewer states showing increasing economical growth.
There comes a betoken where the seat out of stocks rallying versus the seat out of stocks inwards their ain private deport markets is roughly equal. The same is truthful for the economic scheme where eventually at that topographic point are an equal seat out of states participating inwards a recovery versus those that are not. This is the identity crisis betoken inwards which yous choose the potential transition from a bull to a deport marketplace in addition to from an economical recovery to a recession. However, until yous achieve the identity crisis betoken yous choose to adhere to the Wall Street maxims, “The tendency is your friend” or “Don’t struggle the tape.”
Consequently, much of my enquiry is focused on looking for clues every bit to how unopen nosotros are to that identity crisis point. On Fridays, I throw the stock marketplace nether the microscope amongst my “Weekly Bill of Health” study to estimate the degree of participation inwards the bull market; every bit long every bit the bulls choose the upper paw I rest bullish. An illustration of this is yesteryear looking at the pct of stocks within the S&P 1500 that are within 2% of their 52-week highs versus those that are downwardly to a greater extent than than 20% from their 52-week highs. This builds on the study done yesteryear Lowry Research Corp. inwards which they establish that at major bull marketplace tops, on average, entirely 16.54% of stocks were within 2% of their 52-week highs land 22.26% of stocks were 20% or to a greater extent than below their 52-week highs. This highlights the fact that market tops choose an identity crisis when they peak every bit at that topographic point are roughly an equal pct of stocks close novel highs every bit those already inwards deport markets.
Below is information from Lowry’s showing the average breadth of stocks at marketplace tops compared to the 2007 top in addition to the recent breakout to novel highs on Feb 28th inwards the S&P 1500 (the S&P 1500 encompasses nearly 92% of the entire US marketplace cap). As nosotros tin clearly run into from the columns on the far right, at that topographic point is absolutely no identity crisis acquaint inwards the markets every bit bullish stocks clearly outnumber bearish stocks, amongst overall breadth quite healthy.


Given the bulls clearly choose command of the stock marketplace it makes feel that the economical bulls check command of the economy. This tin live seen when looking at the Philadelphia Fed’s Coincident Diffusion Index for all 50 states. Referring dorsum to the identity crisis minute I mentioned, typically nosotros run into the onset of a recession when the Philly Fed’s Diffusion Index is zero, pregnant at that topographic point is an equal seat out of states expanding every bit those contracting. These periods are highlighted yesteryear the bluish arrows below in addition to what is most of import is the fact that the Philly Fed Diffusion Index rested at 74 every bit of the terminate of December, good inwards a higher house the zilch draw associated amongst recessions.


Given the strong economical breadth seen inwards the Philly Fed data, it comes every bit no surprise that our ain recession probability model shows entirely a 4% run a jeopardy the US is inwards or close a recession.


We genuinely live inwards interesting times in addition to nosotros require to opened upwardly our minds to brand feel of how to navigate every bit an investor land also avoiding falling into the "perma-bear" or "perma-bull" camp. If nosotros are to succeed in addition to thrive inwards this climate nosotros choose to live able to accommodate in addition to rest flexible, which was a key concept inwards a swell volume written yesteryear Louis-Vincent Gave, “Too Different For Comfort.” Louis was late interviewed yesteryear Jim Puplava on the Financial Sense Newshourand yous tin hear inwards to the 4 key themes Louis believes volition drive the markets over the coming years yesteryear clicking on the next link:

I’d similar to terminate this article amongst the lastly remarks yesteryear Mr. Gave inwards his book, which are every bit priceless every bit they are timely:
This leads me to conclude amongst the words of my departed friend Clay Allen: “Remember Louis, coin managers are non paid to forecast. Money managers are paid to adapt.” Unfortunately, adapting to this ever-more speedily changing dry ground is non e'er tardily — but at that topographic point is no other recipe for making coin inwards today’s world.

http://www.financialsense.com/contributors/chris-puplava/money-managers-not-paid-forecast-paid-adapt