Swedroe: ‘Gurus’ Without A Clue

July 31, 2015

In my role as director of research for The BAM Alliance, a community of more than 140 registered investment advisor firms, I’m frequently asked both by clients and other advisors to address the issues raised by market “gurus” who make forecasts in the financial media.

These forecasts often create anxiety, so investors naturally ask whether they should be worried. They also want to know what we, as their financial advisors, are doing about these risks.

Dr. Marc Faber is one such “guru.” He’s a frequent guest on CNBC, and is often quoted by the financial media. Faber’s website states that he is “an international investor known for his uncanny predictions of the stock market and futures markets around the world.” Faber is perhaps best recognized for his many prognostications of gloom and doom (he is, after all, editor of the “Gloom, Boom & Doom Report”).

With the world providing him plenty of fodder recently (the debt crisis in Greece, the Federal Reserve’s indication it will soon raise interest rates and China’s slowing economy are but a few examples), Faber is at it again. At the end of April 2015, with the S&P 500 at 2,085, Faber appeared on CNBC to warn investors that “U.S. stocks are due for a correction” of “30 percent or 40 percent minimum!”

Forecasts such as these worry investors and can lead them to abandon even well-thought-out financial plans, especially if they’re already concerned about the same issues being raised.

Faber has been forecasting gloom for the markets for a number of years, and he’s certainly earned the moniker “Dr. Doom.” The question, however, is whether investors should care what he has to say. Should they tune in when he makes a prediction? Or should they instead tune him out?

To help answer that question, we’ll go to my trusty videotape in an effort to hold Faber accountable for his prior forecasts, something the financial media rarely does because it would ruin the game.

Reviewing The Tape
In reviewing my files (I save notable forecasts, especially bearish ones, from self- or media-anointed “gurus”), I came across an interview published on Dec. 19, 2013 in which Faber makes “three very bold predictions” for 2014. Let’s see how they turned out.

  1. The market will continue to decline from its November 2013 high of 1,813. The S&P 500 finished 2013 at 1,848. It ended 2014 at 2,058 (a price-only gain of about 14 percent from Dec. 19, 2013, and a price-only gain of about 11 percent for 2014). And it closed at 2,127 on July 17, 2015 (a further price-only gain of about 3 percent).
  2. Facebook, Tesla, Twitter, Netflix and Veeva Systems are grossly overvalued, and the basket of shorts in these stocks will return at least 30 percent in 2014. While Faber predicted a loss of 30 percent, as the following table demonstrates, the four stocks he mentioned went on to provide an average gain of 18 percent last year.

12/19/2013 12/31/2014 Change (%) 7/17/2015
Facebook (FB) $55.05 $78.02 42 $94.97
Tesla (TSLA) $140.72 $222.41 58 $274.66
Netflix (NFLX) $53.82 $48.80 -9 $114.77
Veeva Systems (VEEV) $32.94 $26.41 -20 $28.24
Average Return 18

 

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