Most predictions do have one thing in common: hyperbole. The more interest a particular investment seems to get, the more analysts tracking the investment, the lower the probability that investment decisions will be rational and the more likely that the predictions will be wrong
It is often traditional for commentators at the end of the year to make predictions about the coming year. Since I was not born with the gift of prophecy and cannot see the future, last year I started a new tradition. Rather than make predictions myself, I reviewed the predictions of others throughout the year. Fortunately these are quite plentiful. Over the course of the year I have collected them and compared them with the real results.
Most of these predictions do have one thing in common: hyperbole. The more interest a particular investment seems to get, the more analysts tracking the investment, the more coverage the investment gets in the media, the lower the probability that investment decisions will be rational and the more likely that the predictions will be wrong.
Last year like this year I started with gold. Last year there was a prediction that gold would end the year at $2,500. It didn’t. It ended the year at about $1,600. Once again there was another prediction, this one from the Financial Times. Although most of last year’s predictions from the experts at the FT were pretty accurate, this one wasn’t. The prediction was for gold to surpass the 2011 peak of $1,920 and rise above $2,000. The reason for the rise in 2012 was basically the same as the reason in 2011, instability in Europe. To the list of usual problems with sovereign debt, quantitative easing, and lack of alternative investments was added buying by Asian and Middle Eastern investors. Of course the price of gold never got anywhere near $2,000 and did not even break its prior record. The European crisis was stabilized and purchases by buyers in India and China slowed. Although gold made a run at $1,800 twice, it ended the year not far from where it began.
One of the biggest stories of the year and perhaps one of the most painful for retail investors was the story of Facebook. Facebook, with close to a billion users across the globe, is one of the most recognized companies in the world. But there is one problem. It’s free. The creators of Facebook have discovered how to make an incredibly popular product that does not produce income. The main question for the founders and investors in Facebook was how to make money off the concept.
The founder of Facebook, Mark Zuckerberg, has long claimed that the purpose of Facebook was to make the world “open and more connected” and that making money was secondary. With a P/E ratio of 186, investors are making a large leap of faith that eventually Facebook will solve the problem. Prior to its IPO (initial public offering) the predictions for profit implied that it was a sure thing. Jim Cramer, the volatile host of a popular American investment show, crowed that it could double right after it opened. From his standpoint the only problem was to find a way to actually purchase the stock on the date of its IPO. As he remarked “You have to get in to win”.
Of course after all the hype, the stock was a disaster. The IPO was botched. In the first two weeks it lost 25% of its value. After four months had past it was down by 50%. Morgan Stanley, Facebook’s lead underwriters, was not only unrepentant; it basically called Facebook’s investors idiots. According to James Gorman, the chairman, investors looking for immediate gains were ‘naïve’.
Another highly publicized stock had quite a bit more substance. Apple Inc has been rising almost geometrically since it hits its low of 85 in December of 2008. Apple’s return in 2011 was spectacular at 30%, but in 2012 it outdid itself rising by 75% until it reached a high of 705 in late September. The predictions for Apple were even better. It was generally assumed that Apple’s share price would soon reach $1,000, making it the most valuable public company in the world. It was not to be. Despite its paradigm shifting innovations, Apple after its introduction of its most recent iPads and iPhones hit a wall and declined 27%,
The final and perhaps most interesting bad prediction concern the Euro. For the past two years at interval of a few months there has been a Euro crisis. Invariably one of the peripheral countries either runs out of money or the yields on its bonds go through the roof. During that period of time Europe’s economy has progressively gotten worse exacerbating the problem of a mountain of debt. In a consistent environment of pessimism, shorting the Euro seemed like a sure winner. The trade was particularly popular with hedge funds. The legendary John Paulson made billions correctly predicting the crash in 2008 but lost millions shorting German bonds. Perversely the most successful were hedge funds which bought the worst of the worst, Greek bonds. They made a killing.
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)