Experts Agree: You're Investing All Wrong

Back in 2006 when the price of oil was first blasting north of $75 a barrel, I remember hearing a quote from Lord John Browne that's been in the front of my mind lately. Browne, who was then running BP (NYSE: BP  ) , said that it was "very likely that oil prices will range in the medium term around an average of $40. In the long run it could even be $25 to $30." He defined "medium term" as five years and "long run" as about a decade.

Lord Browne was responding to a Goldman Sachs (NYSE: GS  ) report opining that oil was headed for a multiyear spike that would peak over $100 a barrel. According to Goldman, prices would eventually fall back -- but only after high prices were sustained long enough to "meaningfully reduce energy consumption and recreate a spare capacity cushion."

With oil futures around $42 as I write this early on Monday morning, I'm starting to wonder if both sides in that little spat will be able to claim victory. Lord Browne has since moved on from BP, but oil prices are not far from the range he mentioned -- after, sure enough, a spike that peaked well over $100 a barrel.

Of course, Goldman subsequently repeated Abby Joseph Cohen's mistake in 1999 and predicted $200 a barrel just weeks before oil peaked around $147 and started its southbound freefall. It'll take some time before we know if consumption has been "meaningfully reduce[d]," but we can give some credit to them as well.

It all looks clear as day in retrospect, doesn't it?

The problems with prognostication
It doesn't look clear even now. For every expert we can find who buys into Browne's thesis two and a half years on, we can find dozens who say that current prices are a nothing but a short-term trough caused by the economic crisis. Just an overreaction, they say, driven by temporary "demand destruction" as people cut back during hard times. Rest assured, we'll be back up at $70 or $90 or $130 or $200 before too long, they tell us.

And therein we see the problem with expert predictions: Seeing the future in detail is hard. Even those who successfully predict one set of events (like, say, the dot-com crash, or the recent economic crisis) don't have any more of a crystal ball than the rest of us.

For instance, just because longtime bear Peter Schiff predicted (in 2006) that the housing bubble was going to burst doesn't mean that his current predictions (like that gold is going to go to $2,000 an ounce) are a sure thing. Or that any other told-you-so expert is going to be right tomorrow, or five years from now.

So where do we go from here? What voices can we trust amid all of this "expert" noise?

One expert always worth heeding
For me, cutting through the noise and finding a sound course of action starts with the wisdom of Sir John Templeton. Long track records of success always speak more loudly than the hot voices of any given moment, and Templeton's was among the greatest of the 20th century.

As you make your investment decisions in the coming days and weeks, separate your train of thought from the doomsayers and the hype-mongers (in other words, turn off CNBC) and ponder these long-proven principles:

  • Invest, don't gamble. Investing means thinking long-term and focusing on likely sources of growth. Gambling means taking a lot of risk -- consciously or not -- and getting carried away by wishful thinking, and usually ends the way the average casino visit ends. Buying Pfizer (NYSE: PFE  ) because of sound long-term business fundamentals is an investment. Putting your whole portfolio in gold because some guy on CNBC said the U.S. economy was about to collapse? Not so much.
  • Diversify. Templeton famously maintained that a third of his investments were bad ones. "You can neither predict nor control the future," he said, advising investors to hold multiple small positions in order to protect against a blowup in one or two -- or a third.
  • Buy when everyone's pessimistic. As Templeton said, "The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell." There's a lot of pessimism out there right now: General Electric (NYSE: GE  ) ? Honda (NYSE: HMC  ) ? Microsoft (Nasdaq: MSFT  ) ? See any opportunities there?
  • Learn from history. Templeton's most famous quote: "'This time it's different' are the four most expensive words in the investing language." Sometimes things really are different: The mass adoption of the World Wide Web was a seismic change for many industries -- ask newspaper publisher McClatchy (NYSE: MNI  ) how that's working out for them. But more often than not, as with tech stocks in 1999, real estate in 2006, and -- maybe? -- oil prices more recently, when "experts" start saying "it's different," it's time to start thinking about what you'll do if it isn't.

Ultimately, a lot of this boils down to short-term versus long-term thinking. If you listen to the loud voices on CNBC, you're probably "investing" for the next year or two. If you listen to guys like Templeton or Buffett, you're investing for the long haul, and your chances of success are a lot higher.

At our flagship Motley Fool Stock Advisor newsletter, led by Fool co-founders Tom and David Gardner, long-haul investments are the only investments. Their constant search for great companies at great prices has beaten the S&P 500 by over 25 percentage points to date -- and has turned up a number of compelling opportunities in the current market madness. If you'd like to see their top recommendations for right now, sign up for a 30-day free trial -- it takes just seconds, with no obligation to subscribe.

Fool contributor John Rosevear has no position in the companies mentioned. Pfizer is a Motley Fool Income Investor recommendation. Pfizer and Microsoft are Motley Fool Inside Value picks. The Fool owns shares of Pfizer. Try any of our Foolish newsletters free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 10, 2008, at 11:41 AM, rmiers1 wrote:

    Until the SEC restores the uptick rule, hedge funds and huge investors can manipulate stock prices with impunity. Paulson himself said naked shorts were good for the market and that sometimes creation of more than the issued shares were good for the market.

    How can a market exist without rules and benefits only for the wealthy? How can one sell stock he does not own or has not followed the rule to borrow it? How can someone not pay for a trade gone bad?

    I am a Motley Fool, Graham, Buffett type of investor who is tired of great reported quarters only to watch the stock lose 10-30%. Please explain to robertmiers@yahoo.com. The loophole that allows this (proven conspiracy) should not be hard to prove. Maybe we should pass the hat and take on the funds and the financials????

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 789773, ~/Articles/ArticleHandler.aspx, 9/19/2014 6:15:47 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement