Home Radio Segments Guest Segments What Makes Prophets of Financial Doom So Smart? Not Much!

What Makes Prophets of Financial Doom So Smart? Not Much!

Allan Roth, Financial Doom

With Allan S. Roth, Founder of Wealth Logic in Colorado Springs and contributing writer at the Wall Street Journal, AARP, and Financial Planning Magazine

Especially in times of uncertainty—whether political, economic, or personal—we’re out there reading tea leaves for answers. When that uncertainty involves our financial lives, we often turn to these so-called financial gurus tossing out market predictions, some hopeful, but mostly dire. Why do we think they have some access to the unknown when in reality their crystal ball is as cloudy as our own?

Allan S. Roth, Founder of Wealth Logic in Colorado Springs and contributing writer at the Wall Street Journal and AARP, has studied this phenomenon and even teaches a behavioral finance class. The answer, he says, is not in our stars or our tea leaves, for that matter, but is embedded within human nature

There is probably no area more closely tied to our emotions than money. We want to be in control and attaching to a prediction about the market gives us the false sense of steering our own destiny.  And there is no shortage of experts in the media throwing out their theories.

In reality, says Roth, there are no such reliable indicators. The market will do what it will do, dependent on more factors than can be logically assessed by any financial expert.  In fact, the best piece of advice and the one most often quoted by Steve Pomeranz himself is from Warren Buffett: “Be greedy when others are fearful, and fearful when others are greedy.”

Allan Roth has followed and assessed the predictions of some of the better-known market prognosticators such as Mark Yusko, Jim Cramer, and Harry Dent and concluded that in all cases, on the average, the results are even less than 50/50. If you hang in there long enough, one or two of these wild predictions may actually come to pass. But, he says, if anyone could accurately predict the market, they would be wealthy beyond the level of even Warren Buffett who built his wealth by following a steady and thoughtful investing strategy.

Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

Read The Entire Transcript Here

Steve Pomeranz: Have you ever seen those ads predicting stock market doom by the so-called investment profits and gurus?  These people say they have impressive track records of accurate forecasts in the past, but the question is how do you know, and do they really?

I found Allan S. Roth, he wrote an article for Financial Planning Magazine.  He also writes for CBSmoneywatch.com.  He’s taken a closer look at these people, to dig more into the truth.  Let’s welcome Allan Roth to the show.  Hey, Allan, welcome.

Allan Roth: Thanks very much, and by the way I write for the Wall Street Journal and AARP, and haven’t written for CBS for about a year now.

Steve Pomeranz: I guess it’s time to update your bio then, isn’t it?  Okay, so Wall Street Journal, AARP, terrific.  We are all, those of us who are paying attention to the markets and investments, we’re all living in an age of uncertainty, we really want to know the future.  Why are we so addicted to this idea of having to have people predict, and following these gurus?

Allan Roth: It’s natural to want to know the future.  I teach a behavioral finance class, and one of the exercises we go through is to show that humans can’t think randomly.  We don’t want to believe that we don’t know the future.  We want to believe that we’re in control.  The smarter the person is, by the way, the more they want to try to predict the future.  Then we look at, after stocks collapsed in ’08-’09, everything was there, and we do hindsight bias and keep making that mistake over and over again.

Steve Pomeranz: Everybody who—I talk to a lot of people every single day, investors and clients and the like, and many of them say to me, “Well, I kind of knew the market was going to crash”, or “Steve, how come you didn’t know the market was going to crash?  Isn’t that your job?” What do you say to those people?

Allan Roth: You know, I never dreamed that I could charge people $450 an hour to tell them I don’t know the future.  That’s one of the most valuable pieces of advice.  Some very, very boring stuff, like sticking to an asset allocation. Yes, I sold towards the top as part of a re-balancing strategy.  I bought towards the bottom as part of a re-balancing strategy.  It’s very hard to accept that we don’t know what stocks will be at a year from now.

Steve Pomeranz: You’ve got these tremendously successful investors, probably Warren Buffet is the most well known of them.  What does he know about the future?  What does he say?

Allan Roth: As he says, and everyone loves to quote him, “Be greedy when others are fearful, and fearful when others are greedy.” That’s kind of what re-balancing does.  It’s incredible, the data that I’ve seen that shows even the good guys on the fee-only investment advisers, very heavy into cash, on October 9th of ’07 …  I’m sorry, very heavy into stocks then, and very heavy into cash at the bottom, March 9th of ’09.

Steve Pomeranz: It’s always a …  it’s not always one decision when the market is selling off like that.  Maybe you get the sell decision right, but then you’ve got an equally important decision as to when to buy.  At the bottom of the market, that’s really the hardest time, psychologically, to take that kind of risk, or, at least, you feel it’s a high risk.  Psychologically, it’s all working against you.

Allan Roth: Daniel Kahneman’s prospect theory—he won the Nobel Prize for it—that shows we get pleasure out of gaining a dollar but twice as much pain out of losing a dollar.  I’ll tell you, re-balancing in ’08 and ’09 was one of the hardest things I had to do for my portfolio.

Steve Pomeranz: Let’s talk about some of the so-called gurus.  You mention a gentleman by the name of Mark Yusko.  I am not familiar with him, but he makes these bold predictions.  You were at a conference where he made ten bold predictions for 2016.  Tell me what you know about him.

Allan Roth: I’ve been following him for some time because he had a hedge fund of funds known as The Endowment Fund, which I got two clients out of.  The third client, an NBA player, they had gated redemptions, meaning that they were charging him 6-7% annually, and he couldn’t get his money back.  The performance was horrible, so that when I’m at a conference down in Hollywood, Florida, seeing Mark Yusko’s bold predictions with his successful track record, you got to question this stuff.

Steve Pomeranz: Did you ask him about his successful track record?

Allan Roth
: Yes, I did, specifically The Endowment Fund.  It was not a very pleasant conversation.

Steve Pomeranz: I would imagine it was.
Allan Roth: Where he blamed others on that.

Steve Pomeranz: I guess it would be a tad awkward to bring that up when he’s pretending to be a superstar at one of these conferences.
Allan Roth: He also was the manager of two public funds, where you could see what the performance was, which was abysmal.

Steve Pomeranz: Why was he at this conference as one of the top speakers with his ten bold predictions?

Allan Roth: That was what I was trying to question.

Steve Pomeranz: What did you come away with?

Allan Roth: I don’t have a good answer for you.  I do not have a good answer for you.  I did not choose him as a speaker, I assure you.

Steve Pomeranz: Let’s move on.  There’s another individual out there, and I’ve been in the business for 35 years and I remember him when I was working for brokerage firms many, many years ago, his name is Harry Dent.  He’s still around.  He’s still predicting a crash in the DOW.  He’s been predicting that for so long.  I remember the mutual funds that he ended up running, which basically went extinct after just a couple, three years.  Putting his ideas into practice, obviously, was not successful.  What have you found out about Harry S.  Dent?

Allan Roth: I’ve met him.  I’ve interviewed him.  Let me tell you, he’s an incredibly smart man.  I’ll tell you his analysis is incredibly good.  It’s based on the fact that we baby boomers are aging.  The problem is that every morning I get out of bed, I realize I’m aging.  It’s not unique knowledge.  He had not only the Aimed Demographic Mutual Fund that crashed and burned and became extinct but the Dent ETF that followed the same demographics.  I once joked about it, that I was …  No one I’ve seen has had a worse track record, and I was going to come out with an ETF called End Dent to do the reverse of it.

Steve Pomeranz: It’s this idea of flipping a coin.  Obviously, you’ve got a 50/50 proposition of heads or tails, but there are going to be times when you’re going to have a lot more heads or tails than 50% because that’s an average over a long period of time.  There was a time when Harry Dent’s demographic ideas seemed to be correct.  In the ’80s, as the baby boomers were coming up, and they were buying houses and cars, accumulating assets and so on, it seemed to be one of the strong reasons for the bull market.  Yet, he’s still harboring on that one idea, the demographic shift?

AllanRoth: Yes, he is.  Being right once, or for a short period of time, is not a track record. What I think the story on Harry Dent is the fact that he’s still so widely followed, his books do so well.  He’s got a track record, I know of no one that has a worse track record.

Steve Pomeranz: You don’t see that in the materials at all.  It’s very hard for someone to really understand what’s behind these people who are saying that they’re so smart and so successful.
Moving on to another person that we all know, Jim Cramer of a TV show Mad Money, on CNBC.  He’s making stock picks all the time.  What’s his track record?  He seems to be another of these great, self-proclaimed gurus.

Allan Roth: He will brag about his winners and not so much about his losers.  Just as an example, he came out with two stocks to sell, sell, sell immediately, Best Buy and Hewlett-Packard.  I bought both.  They were two of the four best performers over the next year.  A recent study has come out showing not such spectacular performance.  Again, what they will do is brag about winners and not mention the losers.

Steve Pomeranz: He’s on every single day.  What do the statistics show about his predictions on the direction of the market?  Is he better than a coin toss?

Allan Roth: I haven’t looked.  There’s a study out from University of Pennsylvania showing he’s underperformed the S and P 500.  Maybe there are some reasons for it.

Steve Pomeranz: There is a study from CXO Advisory that says, basically, he’s been correct 47% of the time, in terms of him calling directions of the market.  That’s really under 50/50%, 50/50 probability, so probably not so great.  This new study that came out, that said he under-performed the S and P 500, it was for his charitable trust.  He has got to keep a lot of cash in the trust.  I’m not sure that it’s really a valid way to look at his track record.  I think what’s important here is not necessarily the individual, but what we want to tell our listeners, when they see these ads and read these, what’s some of the advice that you can give to them when you see these things, and you start to read them?

Allan Roth: I would say don’t bet your financial future on it.  I would say, ask yourself is this knowledge unique, is it something that no one else knows?  Could you spend ten, fifteen minutes Googling them, and see what their track record is?  Don’t just jump in hook, line, and sinker.  Use some common sense.  If I knew how to beat the market, I wouldn’t be writing a newsletter about it or on TV.  I’d have billions of dollars.  I’d have beaten the market.

Steve Pomeranz: If you were able to foretell the future, you would be a successful investor beyond your imagination, and you wouldn’t have to write about it.  Would you really be giving up your secrets, so everybody could learn them and therefore take away your investment edge?  Common sense, please.

Allan Roth: That’s an important point.  If I had some unique knowledge, and shared it with everyone, then that advantage is gone away.

Steve Pomeranz: My guest, Allan S. Roth, Financial Planning Magazine contributing writer, and also writes for the Wall Street Journal and AARP. Allan, you have a practice located in Colorado, right?

Allan Roth:
I do, strictly hourly.

Steve Pomeranz: What’s the name of it?

Allan Roth: Wealth Logic

Steve Pomeranz: For more information about Allan and to read this or to hear this interview again, don’t forget to go to onthemoneyradio.org.  Thanks ,Allan.

Allan Roth: Thank you, take care.