Home
In this issue
April 9, 2014

Jonathan Tobin: Why Did Kerry Lie About Israeli Blame?

Samuel G. Freedman: A resolution 70 years later for a father's unsettling legacy of ashes from Dachau

Jessica Ivins: A resolution 70 years later for a father's unsettling legacy of ashes from Dachau

Kim Giles: Asking for help is not weakness

Kathy Kristof and Barbara Hoch Marcus: 7 Great Growth Israeli Stocks

Matthew Mientka: How Beans, Peas, And Chickpeas Cleanse Bad Cholesterol and Lowers Risk of Heart Disease

Sabrina Bachai: 5 At-Home Treatments For Headaches

The Kosher Gourmet by Daniel Neman Have yourself a matzo ball: The secrets bubby never told you and recipes she could have never imagined

April 8, 2014

Lori Nawyn: At Your Wit's End and Back: Finding Peace

Susan B. Garland and Rachel L. Sheedy: Strategies Married Couples Can Use to Boost Benefits

David Muhlbaum: Smart Tax Deductions Non-Itemizers Can Claim

Jill Weisenberger, M.S., R.D.N., C.D.E : Before You Lose Your Mental Edge

Dana Dovey: Coffee Drinkers Rejoice! Your Cup Of Joe Can Prevent Death From Liver Disease

Chris Weller: Electric 'Thinking Cap' Puts Your Brain Power Into High Gear

The Kosher Gourmet by Marlene Parrish A gift of hazelnuts keeps giving --- for a variety of nutty recipes: Entree, side, soup, dessert

April 4, 2014

Rabbi David Gutterman: The Word for Nothing Means Everything

Charles Krauthammer: Kerry's folly, Chapter 3

Amy Peterson: A life of love: How to build lasting relationships with your children

John Ericson: Older Women: Save Your Heart, Prevent Stroke Don't Drink Diet

John Ericson: Why 50 million Americans will still have spring allergies after taking meds

Cameron Huddleston: Best and Worst Buys of April 2014

Stacy Rapacon: Great Mutual Funds for Young Investors

Sarah Boesveld: Teacher keeps promise to mail thousands of former students letters written by their past selves

The Kosher Gourmet by Sharon Thompson Anyone can make a salad, you say. But can they make a great salad? (SECRETS, TESTED TECHNIQUES + 4 RECIPES, INCLUDING DRESSINGS)

April 2, 2014

Paul Greenberg: Death and joy in the spring

Dan Barry: Should South Carolina Jews be forced to maintain this chimney built by Germans serving the Nazis?

Mayra Bitsko: Save me! An alien took over my child's personality

Frank Clayton: Get happy: 20 scientifically proven happiness activities

Susan Scutti: It's Genetic! Obesity and the 'Carb Breakdown' Gene

Lecia Bushak: Why Hand Sanitizer May Actually Harm Your Health

Stacy Rapacon: Great Funds You Can Own for $500 or Less

Cameron Huddleston: 7 Ways to Save on Home Decor

The Kosher Gourmet by Steve Petusevsky Exploring ingredients as edible-stuffed containers (TWO RECIPES + TIPS & TECHINQUES)

Jewish World Review

Why spotting bubbles is so much harder than you think

By Morgan Housel






JewishWorldReview.com | It's that time again.

A growing group of pessimists are asking whether the stock market is back to bubble territory. Some are even comparing it to 1999. They say stocks are being inflated by the Fed. That they're disconnected from the reality of a weak economy. That they're overvalued and bound to fall.

Could they be right? Of course.

They make a forceful case with charts and ratios and historical data.

But they have been making the same argument for four years now, and they have been wrong all the way. Clearly, the world is more complicated than the pessimists assume.

Consider that the S&P 500 has risen as much as 60 percent since these quotes went to press:

"The S&P 500 is about 40 percent overvalued" -- Bloomberg.com, Oct. 26, 2009

"US Stocks Surge Back Toward Bubble Territory" -- BusinessInsider.com, Jan. 11, 2010

"On a valuation basis, the S&P 500 remains about 40 percent above historical norms on the basis of normalized earnings." -- BusinessInsider.com, July 13, 2010

"Is The Stock Market Overvalued? Almost Every Important Measure Says Yes" -- BusinessInsider.com, Nov. 1, 2010

"The market is as overvalued now as it was undervalued (in early 2009)," said David A. Rosenberg, chief economist and strategist for Gluskin Sheff, an investment firm." -- NYTimes.com, March 28, 2010

"Andrew Smithers, an excellent economist based in London, is telling us that we're way too optimistic, that fair value for the S&P 500 is actually in the 700-750 range. Smithers, therefore, thinks the stock market is about 50 percent overvalued." -- SeekingAlpha.com, June 18, 2010

Sure, you might say these calls were just early. But let me put forth a truism in finance: When an average business cycle lasts five years, there is no such thing as four years ahead of the game. You are just wrong.

Some of the bubble arguments haven't changed in the face of a 50-percent rally. Take the cyclically adjusted price/earnings ratio, or CAPE. In 2010, the S&P 500, which traded near the 1,000 level, had a CAPE valuation of around 22, which many pointed out was about 40 percent above historic norms. Today, trading above 1,600, the S&P 500 has a CAPE of about ... 23. Even as the market exploded higher, the degree to which the market is supposedly overvalued hasn't changed that much, since companies have been busy investing in their operations and boosting earnings. That's why being four years early means being four years wrong.

My point here isn't to relish in other people's bad predictions -- although I never tire of doing so. And let's state loud and clear: The higher the market goes today, the lower returns will be tomorrow. There will be more recessions, pullbacks, crashes and panics in the future.

But there are several lessons we can learn from four years of failed bubble predictions.

1. Never rely on single-variable analysis. Einstein said, "Everything should be made as simple as possible, but not simpler."

Wall Street blew up in 2008 after relying on mind-blowingly complex forecasting models that attempted to measure risk out to the fifth decimal point. Most investors now realize how flawed these complicated models were. But then they turn around and do the opposite, dramatically oversimplifying by trying to explain the global economy with a single metric. That's just as crazy.


FREE SUBSCRIPTION TO INFLUENTIAL NEWSLETTER

Every weekday JewishWorldReview.com publishes what many in the media and Washington consider "must-reading". In addition to INSPIRING stories, HUNDREDS of columnists and cartoonists regularly appear. Sign up for the daily update. It's free. Just click here.


History tells us that the single best gauge of future market returns is current valuations. But even a rational valuation measure like CAPE has only a small amount of predictive power.

The single most powerful variable when trying to predict the future is the "X" factor that represents human psychology, historical unknowns and random chance. It doesn't care about your political views or what you think is a fair market value, and it's going to humiliate your predictions 90 percent of the time.

2. Realize that some analysts are stubborn to a fault. Some people predicted the financial crisis in 2008. And good for them. But many of them also predicted a financial crisis in 2007, 2006, 2005, 1997, 1995, 1992, 1985, 1970 and so on. They are perma-bears who get ignored during booms and lionized during busts, even though their arguments rarely change. It's the classic broken-clock-is-right-twice-a-day syndrome.

Author Daniel Gardner wrote earlier this year:

"In 2010, (Robert) Prechter said the Dow would crash to 1,000 this year or in the near future. The media loved it. Prechter's call was reported all over the world. Which was nice for Prechter.

"Even better, very few reporters bothered to mention that Prechter has been making pretty much the same prediction since 1987."

It was similar for investor Peter Schiff. There's a great YouTube video -- worthy of some 2.1 million views -- of Schiff predicting a market crash circa 2007. That was an excellent call. But there's another video of Schiff in 2002 predicting all kinds of gloom that never happened. Sadly, that video received only a handful of views. Gardner writes in his book, "Future Babble":

"(Schiff predicted the 2008 crisis,) but it's somewhat less amazing if you bear in mind that Schiff has been making essentially the same prediction for the same reason for many years. And the amazement fades entirely when you learn that the man Schiff credits for his understanding of economics -- his father, Irwin -- has been doing the same at least since 1976."

The ideal pundit is one with a flexible mind who doesn't become wedded to forecasts for ideological reasons. Alas, few of them exist.

3. Missing a rally can be more devastating than getting caught in a crash.

The vast majority of entrepreneurs, business leaders, policymakers, teachers and consumers try hard to make the world a better, more productive place. In aggregate, they succeed the vast majority of the time. That's why there's a strong upward bias to equity markets over time.

It's also why missing a market rally can be a bigger risk to your finances than getting caught up in a crash. Getting caught in a crash usually means having to wait a few years at most -- which everyone invested in stocks should be prepared to do. But missing a rally can be a permanently lost opportunity. People spend so much time trying to avoid temporary pullbacks that they forego enduring market gains. If that's your thing, stick with bonds -- stocks aren't for you.

I can say with high confidence that over the next 20 years, we will have several severe market pullbacks, yet stocks will trade substantially higher than they do now. Why focus on the former and ignore the latter?

(Morgan Housel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.)

Sign up for the daily JWR update. It's free. Just click here.

Interested in a private Judaic studies instructor — for free? Let us know by clicking here.

Comment by clicking here.

Morgan Housel, a columnist at The Motley Fool, is a two-time winner, Best in Business award, Society of American Business Editors and Writers and Best in Business 2012, Columbia Journalism Review.


Previously:


When smart investors do stupid things

The deep downside of home ownership

The biggest retirement myth ever told

He's rich, smart and old: Listen to him

Admit it: No one has any idea what's going on

Gold collapse: The start of something big?

BAD NEWS: EVERYONE IS RIGHT!

Twitter: The carnival barker of investing

Warning: Don't waste your capital being fooled by profit prophets

25 important things to remember as an investor

New paradigm for both drivers and car companies

Biases that make you a bad investor

Nine financial rules you should never forget

Gaining from financial destruction

How to read financial news

Housing: Partying like it's 1925

A rebuttal to student loan horror stories

CONGRATULATIONS: We just saved half a trillion dollars

End this crazy tax: It will boost the economy

Medicare: A dangerously good deal

Economic future looks bright

The Biggest Threat to Your Portfolio (It's Not What You Think)

Bond Market Bull Run dead at 30



© 2013 The Motley Fool. Distributed by Universal Uclick for UFS

Quantcast