With his column saying that we may be inside a pessimism bubble destined to burst, Ross Douthat was trying to cheer me and my gloomer tribe up. Douthat FAIL! He introduced me to this recent NYT profile on stock forecaster Robert Prechter, who makes Nouriel Roubini sound like Jiminy Cricket. Excerpt:

“I’m saying: ‘Winter is coming. Buy a coat,’ ” he said. “Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while.”

His advice: individual investors should move completely out of the market and hold cash and cash equivalents, like Treasury bills, for years to come. (For traders with a fair amount of skill and willingness to embrace risk, he suggests other alternatives, like shorting the market or making bets on volatility.) But ultimately, “the decline will lead to one of the best investment opportunities ever,” he said.
Buy-and-hold stock investors will be devastated in a crash much worse than the declines of 2008 and early 2009 or the worst years of the Great Depression or the Panic of 1873, he predicted.
For a rough parallel, he said, go all the way back to England and the collapse of the South Sea Bubble in 1720, a crash that deterred people “from buying stocks for 100 years,” he said. This time, he said, “If I’m right, it will be such a shock that people will be telling their grandkids many years from now, ‘Don’t touch stocks.’ ”
The Dow, which now stands at 9,686.48, is likely to fall well below 1,000 over perhaps five or six years as a grand market cycle comes to an end, he said. That unraveling, combined with a depression and deflation, will make anyone holding cash “extremely grateful for their prudence.”
Mr. Prechter is hardly the only market hand to advocate prudence now, but nearly everyone else foresees a much rosier future, once current difficulties are past.
For example, Ralph J. Acampora, a market analyst with more than 40 years of experience, said he moved entirely out of stocks and into cash late last month. Now a partner at Alverita, a wealth management firm in New York, he said recent setbacks suggested that the market would drop another 10 or 15 percent, probably until September or October, before resuming another “meaningful rally.”

It’s well worth reading the entire article to see how Prechter reckons on this apocalyptic scenario. Note well that Prechter is very far from a fringe figure; he’s at the top of his profession, even though he’s staked out a radical position on this particular issue. I know myself well enough to know that I’m at risk of confirmation bias when confronted by something like this. Leaving aside Prechter’s scenario, it’s interesting news to me that even market forecasters who think he’s way too pessimistic are moving out of stocks for the time being. That datum got me to thinking about how I’m supposed to know when to phone my portfolio manager and ask him to get us entirely out of stocks. We weren’t hurt badly at all when the market crashed a couple of years ago, because in consultation with him, we had invested conservatively. Still, we do hold some mutual funds now, and I’m wondering if it’s time for a conversation with him to get us out of stocks entirely, at least for now. We don’t have much money at risk in our investment portfolio, but it’s all we have, and it is our retirement.

My question is not, “Is Prechter right?” (OK, so it is my question, but it’s one I’m in no position to determine); my real question is, “How do we make the decision to place a bet on the advice of someone like Prechter?” That is, there are market forecasters who say A, others who say Not A. Investors like me are utterly unsophisticated about these things, but at least I hope I’m smart enough to know what I don’t know. I also know that even the experts can miss calls badly; every expert who missed the coming crash — and that was most of them — cost a lot of people a fortune over their bad advice. A friend of mine who had billions under investment got out of the market and saved his fortune because he could see the last crash coming. He said that he was by no means the only one of his professional circle who could see the data indicating a coming crash, but he was the only one who didn’t double down on gambler’s logic, and assume that he had time to place a few more bets before the casino’s roof closed in. In other words, his self-discipline, and ability to allow cold analysis of the numbers instead of optimistic emotions guide his decision-making, saved everything for him.
But he is a very sophisticated investor. I ain’t. What are people like me and thee supposed to do? Reading Prechter, and factoring in his statements with what you know from your other observations, what do you think?
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