The Weekend Worrier: Why Expert Predictions Are Worthless

Book: Beating the Street by Peter Lynch with John Rothchild | ISBN: 978-0-671-75915-5

Every January since 1986, Peter Lynch sat on a panel of investment experts at the Barron’s Roundtable. They’d meet for eight hours in the Dow Jones offices in Manhattan, under spotlights and hanging microphones. Very serious stuff.

And every single year, these smart, successful money managers spent the first half worrying about why the world was about to end. If you had listened and acted on their predictions, you would have missed the greatest bull market in modern history.

A History of Being Wrong

Lynch lays out the panel’s track record of doom and gloom, year by year.

1986-87: They worried about trade deficits, the collapsing dollar, foreign dumping, the Iran-Iraq War causing an oil shortage, and consumers being too deep in debt. Ironically, 1987 was the year the panel was most optimistic about stocks. It ended with the famous 1,000-point crash.

1988: Two months after the Great Correction, the worrying peaked. Felix Zulauf opened by announcing “the honeymoon, from 1982 to 1987, is over.” That was the most optimistic statement of the day. The rest of the time, panelists debated whether it would be a standard bear market taking the Dow to 1,500, or a killer bear that would “wipe out most people in the financial community” and bring about “a worldwide depression like we saw in the early thirties.”

Instead, stocks went up.

1989: A bit cheerier, although Zulauf pointed out it was the Year of the Snake, which is apparently bad in Chinese cosmology.

1990: The Depression still hadn’t shown up and the Dow was at 2,500. But now there was a real estate collapse to worry about. Seven straight years of up markets meant a down year was overdue. Lynch’s friends, sophisticated investors, were talking about pulling cash out of banks and hiding it at home because they thought the banking system might fail.

Peter’s Principle #4: You can’t see the future through a rearview mirror.

When Barbers Started Buying Puts

By 1990, the pessimism had gone completely mainstream. Lynch started noticing something unusual. Cabdrivers were recommending bonds. Barbers were bragging about buying “puts,” options that increase in value when stocks go down.

Barbers. Buying put options. With their own paychecks.

Lynch saw this as a contrarian signal. If the famous investor Bernard Baruch was right about selling stocks when shoeshine boys are buying them, then the right time to buy is when barbers are betting against the market.

The headlines from fall 1990 were brutal. “How Safe Is Your Job?” “Can Your Bank Stay Afloat?” “A Survival Guide for the Age of Anxiety.” “The Consumer Has Seen the Future, and Gotten Depressed.”

Then the Gulf War started. Military strategists debated how many body bags would be needed. The Iraqi army was the fourth-largest in the world, dug into reinforced bunkers.

At the January 1991 Barron’s panel, the experts were drowning in pessimism. Zulauf predicted the Dow would fall to 2,000 or lower. Michael Price saw a 500-point drop. Marc Perkins saw a fall to 1,600-1,700. Lynch himself said a worst case could bring a 33 percent decline.

Barron’s that week wrote: “Suspense and dread cast a heavy pall over the markets.”

And then 1991 turned into the best year for stocks in two decades.

The S&P 500 gained 30 percent. The Dow gained 25 percent. Smaller stocks shot up 60 percent. If you had listened to the experts and sold, you would have missed all of it.

The Even Bigger Picture

So how do you keep your nerve when the experts are screaming that the sky is falling?

Lynch’s answer is to zoom out. Way out. He calls it the Even Bigger Picture.

Over 70 years, stocks returned an average of 11 percent per year. Treasury bills, bonds, and CDs returned less than half that. This held true through world wars, the Depression, recessions, oil crises, and every other disaster you can name.

During those 70 years, there were 40 scary declines of 10 percent or more. Thirteen were drops of 33 percent or more, including the 1929-1933 crash. And stocks still averaged 11 percent a year through all of it.

Lynch compares market declines to Minnesota winters. If you live in a cold climate, you expect freezing temperatures. When the thermometer drops below zero, you don’t think it’s the beginning of the next Ice Age. You put on a coat, throw salt on the walk, and wait for summer. A drop in stocks is the same thing. Expected. Normal. Not the end.

In 39 out of those 40 declines, selling everything and running for the exits would have been the wrong call. Even after the Big One in 1929, stocks eventually came back.

The Real Lesson

Lynch isn’t saying ignore reality. He worried every year at the Barron’s table. But here’s what he did while worrying. During late 1990 and early 1991, while the headlines screamed and experts predicted disaster, Lynch was buying. He increased his personal stakes in companies. He bought more Magellan shares for his own account. He shopped for bargains in the charitable trusts he managed.

The key to making money in stocks, Lynch says, is not to get scared out of them. Without the willpower to hold on when things look terrible, all the knowledge in the world is worthless.

The best approach is the simplest one. Invest on a regular schedule. Month in, month out. Don’t try to time it. People who invest this way through 401(k) plans and investment clubs consistently do better than people who move money in and out based on feelings.

Because feelings are almost always wrong. People feel best after the market has gone up 600 points and stocks are expensive. People feel worst after it drops 600 points and the bargains are everywhere.

The disciplined investor treats a market drop the way a Minnesotan treats a cold snap. It’s coming. You know it’s coming. And when it arrives, you buy more.

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