Fools and idiots

TravisV sent me a very funny article, pointing out how all the “experts” totally missed the stock market rally.  Consider this a supplement to my previous yesterday’s post.

PS.  The title is taken from the article—I would never be so cruel.



45 Responses to “Fools and idiots”

  1. Gravatar of W. Peden W. Peden
    6. March 2013 at 06:25

    Clearly the fiscal cliff doesn’t worry the markets too much.

  2. Gravatar of TravisV TravisV
    6. March 2013 at 06:55

    To repeat a small point, one thing that confuses me is that Warren Buffett constantly says that long-term Treasuries are an absolutely horrible investment.

    Why is Buffett so confident that the market’s valuation is wrong?

  3. Gravatar of Tyler Joyner Tyler Joyner
    6. March 2013 at 07:27


    Warren Buffett invests on an extremely long time frame, for one thing, and he also takes ownership positions in companies and prefers capital growth to dividends or interest, meaning he can indefinitely defer taxes until he actually wants to spend the money.

    Given that he made his fortune doing exactly that, it’s easy to see why he would hate an investment that involves a very small coupon payment, with possibly large downswings in the event of an adverse interest rate movement, and taxes which are due every year.

    Another data point you guys might be interested in is net flows into and out of bonds versus equities over the past few years. In short, bond funds have seen massive inflows over the past five years, while stock funds have seen net redemptions in 2008-2012. Only in the past few months has that really started to reverse itself.

    So, not only where a lot of the eggheads wrong about the US stock markets, but it’s quite possible that this run is just getting started.

  4. Gravatar of Aidan Aidan
    6. March 2013 at 07:35

    I’d rather see a list of people who called it correctly.

  5. Gravatar of W. Peden W. Peden
    6. March 2013 at 07:42

    Tyler Joyner,

    Do you know if there’s any publicly available data on bond funds and stock funds? I haven’t found anything on FRED.

  6. Gravatar of TallDave TallDave
    6. March 2013 at 07:47

    Amazingly, cutting 2.6% from the planned 3.4% growth in government spending did not actually cause the world to end, despite the Obama’s admin’s best efforts to make cuts in only the most visible and painful areas (hence the TSA delays and the WH tours being cut, even though the POTUS golf budget is bigger than the cuts to either).

    TravisV — I remember him saying that twelve years ago. Like a lot of people who don’t read Sumner, Buffett doesn’t understand what’s happening in the monetary picture.

  7. Gravatar of Steve Steve
    6. March 2013 at 08:15

    People sound smart if they say the rally is a bubble driven by a heroin rush of fed liquidity. It’s good salesmanship.

    I’m still waiting for someone to say the rally is fake, because it’s all driven by NGDP growth! Then they wouldn’t sound so smart.

  8. Gravatar of Steve Steve
    6. March 2013 at 08:17

    Personally, I worry that the fed will blow another ‘anti-bubble’, by trying to artificially prop up the real returns on capital.

  9. Gravatar of Tyler Joyner Tyler Joyner
    6. March 2013 at 08:27

    W. Peden,

    I have weird issues posting URLs on this blog, so I’ll have to work around that. You can go to ICI dot org and go to the “research & statistics” tab and then click on “statistics”.

    They have spreadsheets of estimated long term flows and so forth.

  10. Gravatar of StatsGuy StatsGuy
    6. March 2013 at 08:37

    On Buffett – review a paper called “Betting Against Beta”.

    The argument is Buffett outperformed the market by massively leveraging using secure, low cost, long term debt (debt that costs nothing and doesn’t need to be paid back quickly). Basically, the life insurance float.

    Then he invested in assets with relatively low beta, taking advantage of low leverage cost. Interesting argument.

  11. Gravatar of ssumner ssumner
    6. March 2013 at 08:53

    Aidan, Why would you want to look at a list of foolish people who got lucky? Isn’t it more interesting to look at a list of foolish people who were unlucky–i.e. got what they deserved?

    Statsguy, I did a post on that.

  12. Gravatar of Vivian Darkbloom Vivian Darkbloom
    6. March 2013 at 09:01

    I would like to try to be fair to (some of) those “fools and idiots”. This would include Professor Schiller who was referenced critically (also by me) in an earlier post. Those who correctly called the market rally are not likely any more prescient than those who didn’t. Anyone who makes bold predictions (usually to get media attention) is a fool and idiot in my book, even if they got lucky and got it right for the time being.

    But, what do some of the more rational “fools and idiots” mean, when they say that the market is “overvalued”—-that it won’t go higher? I don’t think so. I think what they mean that the market will likely, at some point in the future, reach a level that is lower than the current level. If true, that would create an even better buying opportunity in the future. Sure, you can argue that the more enlightened of us who ignored the fools and idiots will always sell before that lower level is reached, but I don’t think that’s fair. If you want to be fair, I think you’ve got to assume that those who caught the train will stay on it and those who failed to board will get on when the train arrives back at that prior station they’ve been waiting at (ok, bad metaphor, but hopefully it conveys the sense).

    Admittedly, those who made very bad calls in 2009 are not likely to be able to re-board any time soon, if at all.

    What I suspect someone like Schiller would acknowledge is that there will always be people who will pay more for equities than his model says they should. The pendulum will swing higher, but it will also swing lower (overshooting the mean in either direction). If you buy when the pendulum is above the mean and manage to get out when it is even higher, more power to you. But, good luck with that.

    I’m not a trader (or an individual stock investor) because I know that I’m a fool and an idiot. I’m not smart enough to know when and how far that pendulum will swing. My sense and experience tell me, though, that the stock indices will fall back below the current levels, perhaps well below, so that if I were to sell today I could buy back at a better price in the future. But, I’m not such a fool or an idiot to think that I can time this accurately enough to overcome the tax and transaction costs involved. So, I’ll do what I’ve always done—-nothing— and automatically re-invest the dividends and let Mr. Averages and Mr. Compounding do the rest. Those two are pretty darn smart.

  13. Gravatar of Steve Steve
    6. March 2013 at 09:15

    “foolish people who got lucky?”

    Ask and you shall receive:

  14. Gravatar of Doug M Doug M
    6. March 2013 at 09:57

    For every seller there is a buyer.

    All of the the time half of the market is “wrong.”

  15. Gravatar of Carney Point Carney Point
    6. March 2013 at 09:58

    Scott, congrats on managing not to mention EMH once in your quips about this. So let me: EMH implies that anyone with an explicit view of the future of markets is highly likely to be depicted as fool or an idiot in that future.

  16. Gravatar of 123 123
    6. March 2013 at 10:02

    The list is not entirely fair.
    There are people, who did wrong strategic calls – that is OK.
    But there are also people in the list with wrong tactical calls, wrong relative value calls – this is meaningless. They do such calls everyday, and it easy to pick a day when they are wrong.
    There are also people in the list who did right tactical calls – this is totally unfair.

  17. Gravatar of Doug M Doug M
    6. March 2013 at 10:03

    Robert “Eliot Wave” Prechter has been saying that we were headed for a crash since 1980’s.

    Nuriel Rubini, aka Dr Doom.

    We have a bunch of stopped clocks. i.e. they are right twice a day. They called for a crash their entire carrer, eventually they got one — everyone called them geniuses. Now we are reminded that they have been mostly wrong.

  18. Gravatar of TravisV TravisV
    6. March 2013 at 10:23


    Thanks for mentioning the paper on Buffett: “Betting Against Beta”

    Prof. Sumner says he wrote a post on that paper. Could someone please find the link to that post? Thanks!

  19. Gravatar of TravisV TravisV
    6. March 2013 at 10:27

    Ah, I think I just found it:

    “Three strikes and you’re out”

  20. Gravatar of W. Peden W. Peden
    6. March 2013 at 10:44

    Tyler Joyner,

    Thank you!

  21. Gravatar of TravisV TravisV
    6. March 2013 at 10:44

    Here’s another interesting new study that says that if you want to beat the market, you should focus on gross margin rather than net profit margin:

    “Most investors zero in on the bottom line: a company’s net earnings. But here, it is what is near the top line that matters: total revenues minus basic expenses. When a company’s goods and services take in a lot more money than they cost to produce, that is a high gross profit margin””and a strong signal of quality.

    “You get much more informative signals about the health of firms” this way, Mr. Novy-Marx says.

    That partly is because many of the investments that companies make for their long-term future growth can result in short-term hits to reported net earnings. A firm that spends on research and development, for example, is seeking to bolster its future profits by ensuring that it won’t run out of new products to sell. That spending rise will hurt this year’s net earnings. But the quality measure doesn’t penalize companies for spending on R&D””and thus might be more effective at identifying tomorrow’s more profitable firms today.”

  22. Gravatar of TravisV TravisV
    6. March 2013 at 10:53

    Prof. Sumner,

    Bill Gates, Daron Acemoglu and James Robinson are having an interesting debate about China. It would be interesting to know which side you think is most correct.

    “Institutions matter, a lot” by Ryan Avent

  23. Gravatar of Tyler Joyner Tyler Joyner
    6. March 2013 at 11:08


    I think the issue is more about correlation and relative advantages than what metrics you use to evaluate companies.

    Compared to even 10 years ago, correlations between individual stocks and also between asset classes have gone up considerably. Fifty years ago investing in Europe was a great hedge to your US portfolio. Today those two markets move in near-perfect tandem.

    So when the movements of the larger market have a very high probability of affecting the performance of your Apple stock as much or more than the company’s actual metrics do, does it really matter whether you look at gross margin or net profits or P/E?

    Then there’s the issue of relative advantage. Despite a pretty hefty amount of research questioning the value of active management, of course some people will always believe that someone who is smart enough can “beat the market”. Fine, but what makes you think that person is you? In pure dollar terms, the stock market is mostly composed of pension funds, endowments, mutual funds, hedge funds, and other huge players. All of those players have very highly paid and highly educated people working 80 hour weeks doing nothing but managing money, many with decades of experience. Why do people believe that reading a couple books or browsing some articles on qualifies them to compete?

    I don’t tell people not to gamble, and I’m not suggesting any of the commentors refrain from stock picking or managing your own investments. I just think a little perspective helps.

    Sometimes people ask me things like, “What do you think about Apple?” To which I respond, “I don’t think anything about Apple. If you meet a financial advisor who wants to talk to you about Apple, you should run in the other direction. If they knew what direction Apple was going they would be running a hedge fund”.

  24. Gravatar of Lars Christensen Lars Christensen
    6. March 2013 at 11:54


    Maybe you missed this one:$file/CrossAssetStrategy_140912.pdf

  25. Gravatar of TallDave TallDave
    6. March 2013 at 12:21


    Thanks for that link! I think this sums it up nicely:

    Rather, they would say that Mr Gates is skipping the hardest questions: why some countries go down the infrastructure, education, and market-pricing path while others don’t.

    I’m just finishing their book, it is very persuasive, perhaps because it leans so heavily on the notion that elites respond to incentives rationally. I used to be a “culture dominates” guy but the book makes a powerful case that institutions shape culture, much more so than the other way around. There were a lot of details about places like Uzbekistan and Argentina that I had never seen before.

  26. Gravatar of TravisV TravisV
    6. March 2013 at 12:34


    Thanks for linking to that paper! Fascinating stuff!


    Thanks for your take on Acemoglu and Robinson. Sounds like the book might be worth reading!

  27. Gravatar of J J
    6. March 2013 at 13:32

    Doug M.,
    You are assuming that all market movements are predetermined in some sense. It is possible for a buyer and a seller to agree completely on the possible paths of a stock price and the probability of each path, but to have different risk preferences or different personal risks that they want to hedge against, etc.

    It makes sense that the risk-premium for stocks would be particularly high in this post-financial-crisis world, so it makes sense that the rate of return, given that nothing catastrophic happens, is particularly high. If the risk of catastrophic events goes up, then the rate of return in non-catastrophic worlds will be higher (I say worlds because, of course, the many-worlds theory is true). At the same time, in a world with a higher risk of catastrophic events, we would expect to see more doomsayers predicting a major fall in asset values.

  28. Gravatar of Al Al
    6. March 2013 at 15:00

    Statsguy, that is not an accurate representation of the study. Professor Sumner also misunderstood the study in an attempt to link it to an EMH defense. The authors used idealized models (how come no one measures the effects of the idealizations?) to find that Buffett outperformed the market on a risk adjusted basis, then goosed his nominal returns with P&C (not life) insurance float.

    Personally, I had the impression that the authors were naive with respect to the P&C insurance industry. They measured leverage in way that is neutral to payout pathways, so that $1 of float equals a $1 of non-cumulative preferred equals $1 of debt.

  29. Gravatar of Al Al
    6. March 2013 at 15:02

    Interestingly, using the “Betting Against Beta” methodology, the authors could have been using a hypothetical portfolio in the trillions of trillions and achieved the same results.

  30. Gravatar of maynardGkeynes maynardGkeynes
    6. March 2013 at 15:17

    “Day ain’t over yet…” Jack Palance (City Slickers)

  31. Gravatar of ssumner ssumner
    6. March 2013 at 16:20

    TravisV, I read both sides, and I’m still not too clear as to exactly what they are debating.

    Good policies are very important. And good institutions are more likely to lead to good policies than bad institutions.

    Can’t both sides agree with both those views?

    Maynard, Oh. You mean if stocks ever fall again, no matter how far out in the future, they will have been right?

    Why didn’t anyone tell me it was that easy? I could have been a Wall Street pundit.

  32. Gravatar of TravisV TravisV
    6. March 2013 at 17:10

    Prof. Sumner,

    The big disagreement is about China:

    “Messrs Acemoglu and Robinson are sceptical of the Chinese economy while others, including Mr Gates, are confident that prosperity will continue and that gradual political change will lead to the development of inclusive institutions.”

  33. Gravatar of Bill Ellis Bill Ellis
    6. March 2013 at 17:22

    “Spending, income, and debt responses to minimum-wage hikes”

    excerpt…”To estimate the spending response to a minimum-wage hike, we use data from the Consumer Expenditure Survey. In the year following a $1 minimum-wage hike, we find that spending rises, on average, approximately $700 per quarter for households with minimum-wage workers. As with the income responses, we find no spending response for households without minimum-wage workers, including households with adults paid just above the minimum wage. Virtually all the additional spending is on durable goods. Specifically, spending on new cars and trucks rises by $500 per quarter, of which the majority is debt-financed.”

  34. Gravatar of Saturos Saturos
    6. March 2013 at 19:51

    Scott check this out:

  35. Gravatar of Don Don
    6. March 2013 at 19:51

    There is still plenty of room to go up. There is still more fear than greed. Once there is a stampede of greed (people are lemmings), then we’ll be someplace.

    That said, if the EU had imploded, and it is still might, the DOW could have dropped a bunch more. Or, if Bernanke had been even more of a wuss, or TheMoneyIllusion hadn’t improved monetary policy, we could be in the 5 year of recession (rather than stagnation) and the DOW would rightly be at 4000.

  36. Gravatar of Saturos Saturos
    6. March 2013 at 19:56

    Steve Waldman links to this new Kaminska post:

  37. Gravatar of Steve Steve
    6. March 2013 at 20:36

    ssumner, you sly dog!

    Bentley’s Sumner, Bloomberg’s Baum Discuss Fed Targets (Audio)

    Mar 6, 2013

    Scott Sumner, professor of Economics at Bentley University, discusses how it would work for the Federal Reserve to switch to a policy of nominal GDP targeting and why it would be better than what the Fed is doing now. Sumner talks with Bloomberg’s Kathleen Hays, Vonnie Quinn, and Caroline Baum on Bloomberg Radio’s “The Hays Advantage.”

  38. Gravatar of Geoff Geoff
    6. March 2013 at 20:47


    “Why is Buffett so confident that the market’s valuation is wrong?”

    What market?

  39. Gravatar of Geoff Geoff
    6. March 2013 at 20:48

    Dr. Sumner:

    “You mean if stocks ever fall again, no matter how far out in the future, they will have been right?”

    Not if they don’t fall in the future. 🙂

  40. Gravatar of maynardGkeynes maynardGkeynes
    6. March 2013 at 21:23

    “You mean if stocks ever fall again, no matter how far out in the future, they will have been right?”

    Would you say that Keynes was “wrong” about the German mark?

  41. Gravatar of ssumner ssumner
    7. March 2013 at 05:54

    Lars, I didn’t want to list those who got lucky. 🙂

    Travis, OK, but the China disagreement is not over models of development, but rather over whether China will continue to instritute institutional reforms. I agree with Gates, but I can’t rule out the alternative being correct. Both sides agree that China needs good policies to become rich.

    Bill, That doesn’t address monetary offset.

    Saturos, Very interesting links. Thank you.

    Maynard, It’s not helpful when you answer a specific question by not answering, but instead posing a completely unrelated question.

  42. Gravatar of TallDave TallDave
    7. March 2013 at 06:46

    Scott — Just finished the A&R chapter on China last night — absolutely fascinating how Deng Xiaoping managed to unseat the Maoist Gang of Four and replace nearly the entire upper Chinese hierarchy with his own reformers. It’s one of those pivotal moments in human history where humanity was fortunate.

    What doesn’t bode well, though, is that Deng was confident enough to engage in those reforms mostly because the Maoist excesses had so thoroughly crushed any opposition — limited markets are no threat to the ChiCom leadership. The Chinese reforms may only last as long as they don’t threaten the new elites, who have no interest in transitioning to an inclusive political system that could easily throw them out of power, robbing them of their state-derived incomes in the process.

    Of course, it’s certainly possible more enlightened leadership will arise and guide them toward democratic reforms, and we shouldn’t discount that possibility. The post-1688 English Parliament could have consolidated their power around extraction instead of embracing the creative destruction that launched the Industrial Revolution, but they didn’t and we enjoy the consequences of that decision every day. China has a lot of inertia going the right way, so there’s some reason for hope.

  43. Gravatar of Sam Sam
    7. March 2013 at 08:01

    What happened to buy low, sell high? I’m in university now but in 2009-2010 I was just finishing highschool. I wasnt a sophisticated investor, but I at least understood the huge opportunity of depressed asset prices. I put half my summer earnings into a mutual fund and it’s increased 30% in 3 years.

  44. Gravatar of ssumner ssumner
    7. March 2013 at 13:22

    TallDave, China has continued to do economic reforms, I think it’s unlikely the process will suddenly stop.

  45. Gravatar of TallDave TallDave
    7. March 2013 at 21:17

    Scott — Yes, but they tend to enrich the elite.

    We’ll see if that continues when economic growth starts to require creative destruction instead of merely taking the step up from basket-case to dysfunctional.

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