Soothsayers Disguised as Sages

I’m sorry to inform investors out there – the stock market doesn’t happily bounce back to historical averages on a regular basis.

I hear a lot of “academic” sounding arguments that predict the direction of the market based on its “valuation metrics” – also called its “multiple.” It sounds so learned and so well founded. After all, aren’t we talking about the “fundamentals” – earnings vs. price, the non-emotional way to invest.

Too bad none of this works, and that is what a real academic will tell you, not just a soothsayer disguised as an academic.

Liz Ann Sonders has one such moment on this video, arguing where she thinks the market will go because of its valuation. If you watch the whole video, you will see she goes on for a long time with explanations that sound intelligent, but don’t actually say anything substantive. The Oracle of Delphi would be proud.

Here is why I picked out this video. There are a lot of “hot shot” types that go on the media and give wild predictions, but you can see them for what they are – gamblers and fortune tellers. Liz Ann Sonders is another type. They seem much more professional, reasonable, and trustworthy. Their advice is more tame. You’d like to invite them over for dinner. But at the end of the day they are just guessing, and they know better than this.

Is it ever predictable?

Here is the reality. The valuation of the market might….maybe…give us an extremely vague idea of what the market will do over a decade time frame. And this is only in extreme examples when the valuation gets to highs or lows that only come around a couple of times per century. Keep in mind that even this is highly debatable.

For about 20 years following 1990, the market stayed at valuations much higher than the historical average. There is no reason that the market won’t stay below its historical average valuation for the next 20 years. In fact, with all the baby boomers set to retire, this may well be what happens. In any event, there is no reason to think it will just snap back to its historical averages each year. This is utterly absurd.

The Danger

Families have got to understand what they can and can’t predict – what they can and can’t control. Having the wrong ideas on this subject can ruin an inheritance. Having the right ideas can help wealth grow and pass from generation to generation.