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Bears Turn To Bulls In The Space of A Month

By Dan Hutton on March 14, 2012 in

Readers of the January edition of The Beast may have had a bit of a chuckle at our 10 Stockmarket Predictions for 2012, but nothing is as funny as the real thing.

Under the heading ‘Global Strategists Are Abandoning Bearish Views’, Bloomberg recently documented the year’s first about face:

Strategists at the biggest banks are capitulating on their bearish forecasts after the best start to a year for global stocks since 1994 and gains of more than 7 percent in emerging-market currencies.

Just two weeks after saying that investors should “remain cautious”, Larry Hatheway, the chief economist at UBS AG, raised his recommendations on global shares and high-yield bonds in a Jan. 23 note to customers entitled “Wrong, but not too late”. Royal Bank of Scotland and Benoit Anne, the global head of emerging-markets strategy at Societe Generale SA, said their estimates for developing nations were proven wrong.

The MSCI All-Country World Index climbed 5.7 percent in January, surprising strategists at Bank of America Corp., Goldman Sachs Inc. and Barclays who had forecast first-half losses because of Europe’s debt crisis.

The Bank of America analyst explained where everyone went wrong: “In hindsight, everybody was so beared up at the end of last year, there was nowhere for the market to go but up.”

Of course! Our obsession with predicting the future is farcical. It can also be very detrimental. A very wealthy close friend of mine called me in a small panic prior to Christmas. He’s a Eureka Report subscriber and Alan Kohler’s final ‘Weekend Briefing’ for last year told him that the “risk of another major panic sell-off on the market” was so high that my friend “must take action”. Kohler himself was planning on significantly reducing his “already reduced exposure to equities, possibly to zero”.

I told my friend that I had no idea whether there was going to be another panic sell-off or not, but that the risks Kohler was so worried about (Europe, US, China, etc.) were consensus views and all over the front pages of the paper. Generally, that means they are already factored into share prices.

There is money to be made by those who can buy when all the evidence suggests sell and sell when all of the evidence suggests buy. But it’s a lot easier said than done. If it wasn’t difficult, the opportunity would never arise.

For most of us, the best strategy is to allocate a portion of our long-term savings to the stock market and ignore the annual ups and downs and the manic-depressive nature of the media. Accept that we can’t pick the top or the bottom, but avoid following the lemmings off a cliff at exactly the wrong time.

Most retail investors end up with results significantly worse than an index fund, simply because they negate the long-term advantages of owning equities by entering and exiting the market at exactly the wrong times.

There could be another panic sell-off tomorrow, next week or the week after. No one knows. If they did, it would already have happened today.