My 6 Monkey-Level Investing Predictions

Last week, Motley Fool founder David Gardner made a spirited call to hold investing pundits to account in Moneyballing the Financial World. Here's my contribution, as I review four predictions I made at the end of last year -- and make a few new ones for 2012.

1. Stocks will outperform bonds: WRONG

Year-to-date return, stocks:        0.9%         [S&P 500 Total Return Index]     

Year-to-date return, bonds:        7.3%         [Barclays Capital U.S. Aggregate Bond Index]

Unless stocks rally strongly to close out the year, there'll be no sugar-coating this one; I got it flatly wrong. Year-to-date, bonds have beaten stocks by nearly six-and-a-half percentage points (using a broad market bond index that includes U.S. government and agencies, corporate, and mortgage- and asset-backed securities.) That's not the half of it: While stocks were content to tread water, long-dated Treasuries produced a growth-stock-worthy 31% return!
I was looking for increases in share buybacks and M&A activity to lift share prices. Both of those things occurred. Companies in the S&P 500 bought back roughly $400 billion of their own shares in the 12 months to Sept. 30 -- a 55% increase over the prior 12 months. In dollar terms, acquisitions activity grew 15%. I also thought individual investors would return to stocks, which didn't happen.

2. Large- and mega-cap stocks will outperform small caps: RIGHT

Capitalization Segment

2011 Return*

Benchmark Index

Mega cap

2.5%

Russell Top 200 Index

Large cap

1.2%

Russell 1000 Index

Small cap

(3.7%)

Russell 2000 Index

*At Dec. 22, 2011. Source: Russell Indexes

At the end of last year, small caps had beaten large caps by a whopping 4.5 percentage points on an annualized basis over the prior 10 years (that may not sound like much, but when it is compounded, it amounts to a real difference.) This year, small caps' reversal of fortune has reduced that margin to 2.4 percentage points.

Will this continue in 2012? I think so. The relative performance of different market capitalization segments is cyclical. The pendulum of small cap outperformance will swing back to zero -- that's ineluctable.

In addition, the high-risk and high-uncertainty macroeconomic environment favors larger, better-established names. Look for large-cap stocks to beat small caps next year, with the mega-cap segment beating both of them (i.e. the same performance ranking as this year). You can track my prediction in CAPS, The Motley Fool's investor-driven, stock-rating application. I'm going to rate the iShares Russell 2000 ETF 'underperform' and the Rydex Russell Top 50 ETF as 'outperform.'

3. Gold will break $1,600 and $1,150: PARTIALLY RIGHT

YTD High (closing price):    $1,895

YTD Low (closing price):    $1,319

YTD Return:                        13.7%                                                                   

I got this one half-right. Predicting that gold would break $1,600 in 2011 must seem like a slam-dunk in hindsight. The yellow metal smashed through $1,600 on its way to an all-time (nominal) high above $1,900 on the back of Europe's festering sovereign debt crisis. Since then, gold has lost much of its momentum and we are now back down around... $1,600. Despite a eurozone crisis that is far from over (among other problems), owning gold now is even riskier than it was at the beginning of the year. SPDR Gold Trust (NYSE: GLD  ) shareholders, you've been warned! (The same warning holds for investors in another precious metal via the iShares Silver Trust (NYSE: SLV  ) , by the way.)

4. Facebook goes public: WRONG
I thought for sure that Facebook would launch its initial public offering in 2011, arguing that "Facebook's employees and its venture-capital backers must be intensely impatient" to monetize the buzz surrounding the company and the broader social-networking sector. I overlooked early investors' ability to monetize their pre-IPO shares through private markets. There was a gold rush of social-networking IPOs this year, but Facebook remained above the fray.

Facebook's flotation is now expected for 2012. At the end of June, I predicted that the company would close its first day of trading in the public markets with a market capitalization above $150 billion. I still stand by that prediction today.

While we're on the topic, many investors will be able to share one experience: That of earning poor returns on social-networking stocks. I predict that an equal-weight, 'new-tech' portfolio of LinkedIn (Nasdaq: LNKD  ) , Groupon (NYSE: GRPN  ) , and Zynga will underperform an 'old tech' one made up of Microsoft (Nasdaq: MSFT  ) , Cisco Systems (Nasdaq: CSCO  ) and Hewlett-Packard (NYSE: HPQ  ) over the next three years.

Looking forward
My score is three out of six (numbers two and three actually contain two separate predictions), or 50%. It's nice to know that an expensive education, and much time and effort have lifted (lowered?) me to the same level as a dart-throwing monkey. Can you do better? Tell me if you agree or disagree with the new predictions I've made above or give me your predictions for 2012 in the comment area below.

Fool contributor Alex Dumortier holds no position in any company mentioned. Click here to see his holdings and a short bio. You can follow him on Twitter. The Motley Fool owns shares of Cisco Systems and Microsoft. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems and Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (24) | Recommend This Article (31)

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 29, 2011, at 11:17 PM, Notfooled1 wrote:

    You could get 3 out of 6 right by flipping a coin. You have not shown sagacity in the past and we would be well advised not to follow your predictions in the future.

  • Report this Comment On December 30, 2011, at 12:36 AM, sliderw wrote:

    We need to know how much conviction is behind each prediction. If you put a hypothetical $X on prediction A and $Y prediction B, and you only got A right, the weighted outcome may be very different from 50%.

  • Report this Comment On December 30, 2011, at 12:38 AM, ikkyu2 wrote:

    Come now, notfooled. There is some value in being wrong, but for the right reasons.

    I will make this prediction: for the duration of 2012, investors in either of your 'new tech' or 'old tech' funds would have done better in any of the following: AAPL, INTC, AMZN, Samsung, Treasuries, or cash.

  • Report this Comment On December 30, 2011, at 1:54 AM, blearynet wrote:

    I applaud your honesty. It is refreshing.

  • Report this Comment On December 30, 2011, at 6:42 AM, skypilot2005 wrote:

    Alex Dumortier wrote:

    “Despite a eurozone crisis that is far from over (among other problems), owning gold now is even riskier than it was at the beginning of the year. SPDR Gold Trust (NYSE: GLD ) shareholders, you've been warned! (The same warning holds for investors in another precious metal via the iShares Silver Trust (NYSE: SLV ) , by the way.)”

    “Tell me if you agree or disagree with the new predictions I've made above or give me your predictions for 2012 in the comment area below.’’

    Alex for clarification; You are predicting that GLD and SLV are going to under perform the Rydex Russell Top 50 Jan 1 2012 thru Dec 31 2012?

    On the edge of my seat….

    :)

    Fool On

    Sky Pilot

  • Report this Comment On December 30, 2011, at 8:36 AM, dag154 wrote:

    Well that was useful!

    1 right, 1 partially right and 2 wrong. You have indeed shown your limitations at predicting the future.

    Not a problem ... except when you start predicting the future again!

    Who knows, you might just get lucky this time.

  • Report this Comment On December 30, 2011, at 9:46 AM, EnjoyingLifeNow wrote:

    Predictions are a waste of everybody's time.

  • Report this Comment On December 30, 2011, at 10:23 AM, georgeung wrote:

    What an interesting article. I agree with Blearynet that this article is refreshing.

  • Report this Comment On December 30, 2011, at 11:26 AM, TMFAleph1 wrote:

    "Alex for clarification; You are predicting that GLD and SLV are going to under perform the Rydex Russell Top 50 Jan 1 2012 thru Dec 31 2012?"

    Predictions are difficult at the best of times, but 1-year predictions regarding assets as volatile as gold or silver is a fool's game -- particularly when they are highly overpriced, as is the case now.

    I have no idea whatsoever which of GLD, SLV or the Rydex Top 50 will perform best in 2012. However, given the choice of owning just one of them, I wouldn't have a single moment's hesitation.

    Alex D

  • Report this Comment On December 30, 2011, at 11:30 AM, TMFAleph1 wrote:

    "1 right, 1 partially right and 2 wrong. You have indeed shown your limitations at predicting the future."

    This is not the correct accounting, which I give in the article (3 right, 3 wrong.)

    Alex D

  • Report this Comment On December 30, 2011, at 11:31 AM, TMFAleph1 wrote:

    Good point, sliderw!

  • Report this Comment On December 30, 2011, at 1:29 PM, hiddenflem wrote:

    I appreciate your honesty. Every year the pundits on tv talk about their picks for the year but seldom revisit how well they did.

  • Report this Comment On December 30, 2011, at 1:35 PM, mountain8 wrote:

    My predictions:

    The US economy will slowly, very slowly, improve throughout 2012.

    Europe will pull through but keep us on the edge for the whole year.

    The stock market will end up for 2012 in all sections whether Dow, NASDAK or whatever.

    If Romney or Gingrich win the presidency, the stock market will go up.

    If Paul is elected, the stock market will go down and the overall well-being of the US will go up.

    If anyone else is elected, I'm leaving the country.

    If Obama is re-elected I believe the Mayan prediction about dec 2012 will come true. It won't matter where I try to run to.

  • Report this Comment On December 30, 2011, at 2:06 PM, skypilot2005 wrote:

    On December 30, 2011, at 11:26 AM, TMFBullnBear wrote:

    “but 1-year predictions regarding assets as volatile as gold or silver is a fool's game -- particularly when they are highly overpriced, as is the case now”

    Alex,

    I just looked at the 52 week chart for Silver’s Spot Price. Are you familiar with it? It will definitely be higher next year at this time. Close of business Monday December 31. The only “wild card” will be the result of the presidential election here in the U. S.

    Since you maintain that Silver is highly overpriced, who about a “Foolish” friendly wager? I want one of those “Fool” hats. Let me know what I need to put up on my end of the bet.

    I am open to “sweetening” the bet if, you also agree to change your screen name to TMF EasyMoney.

    Fool On,

    Sky Pilot

  • Report this Comment On December 30, 2011, at 2:10 PM, feynmanshomeboy wrote:

    Re point #2)

    Premise of mean reversion of small cap and large cap segments is nonsense.

    Equity risk premium implies rewards that are greater than linear with risk, e.g. incremental increase of one percent risk of default on a loan is associated with perhaps a 1.5% increase in the interest rate. It follows that if equities are rationally priced, riskier segments should outperform over sufficiently long periods of time.

    Note that I'm not criticizing your other rationale for relative yearly performance of the two segments.

  • Report this Comment On December 30, 2011, at 2:18 PM, TMFAleph1 wrote:

    "It will definitely be higher next year at this time."

    I find that kind of certainty puzzling.

    Unfortunately, I don't have access to the jester caps... In any event, even if I believe that silver is overpriced, I really don't have any edge when it comes to determining where the price will be in a year's time, so I would need favorable odds to place a wager.

    AD

  • Report this Comment On December 30, 2011, at 2:21 PM, TMFAleph1 wrote:

    "Equity risk premium implies rewards that are greater than linear with risk, e.g. incremental increase of one percent risk of default on a loan is associated with perhaps a 1.5% increase in the interest rate."

    The argument does not rely on linearity of risk/ return relationship.

    AD

  • Report this Comment On December 30, 2011, at 2:38 PM, Dagansinferno wrote:

    "mountain8 wrote:

    If Romney or Gingrich win the presidency, the stock market will go up.

    If Paul is elected, the stock market will go down and the overall well-being of the US will go up.

    If anyone else is elected, I'm leaving the country.

    If Obama is re-elected I believe the Mayan prediction about dec 2012 will come true. It won't matter where I try to run to."

    Like the humor. However, I would have to amend that if Ron Paul is elected, there may be a short drop, but things will improve and the markets will improve. More so accounting for the factor that he plans on making large adjustments, however is favorable for a free market. He'd likely repeal Sarbanes-Oxley, etc. So, it's not unreasonable to see a short decline in the market due to "uncertainty" of how things will play out; especially in regards to monetary policy. But, again, we'll see (obviously).

    I do want to add this: depending on who wins the election, I'm not personally confident the overall market will be good in 2012. There's certainly a lot frustration and concern with the public over the NDAA and SOPA. Therefore, the amount civil unrest in this country I think is at its low-end. The OWS is just the iceberg. Even if a non-Obama candidate (RP, Romney, etc..) is elected, it will still take a grave amount of work for correction. The question is, how will such legislation such as SOPA play out? Will it stifle and suppress innovation? Will NDAA be abused causing large amounts of unrest in the country?

    Granted, not that OWS caused undue harm to Wall Street, but my point is there's still a lot more uncertainty to play out. If Obama does get re-elected...well, let's say I've already been exploring my options to live elsewhere. But, I guess if nothing else, the chances of defense spending (i.e. contracts for U.S. companies that make surveillance equipment, etc) will go up....maybe just dump all our money into VIX : )

  • Report this Comment On December 30, 2011, at 9:30 PM, skypilot2005 wrote:

    December 30, 2011, at 2:18 PM, TMFBullnBear wrote:

    "It will definitely be higher next year at this time."

    "I find that kind of certainty puzzling.

    Unfortunately, I don't have access to the jester caps... In any event, even if I believe that silver is overpriced, I really don't have any edge when it comes to determining where the price will be in a year's time, so I would need favorable odds to place a wager.

    AD"

    Great reply. I enjoyed it. I’ll get back with you on the odds. All my degenerate gambler friends are in Vegas for the holiday. :)

    Based on my understanding of Macroeconomics, the collective budget deficits the U. S. is incurring is going to negatively affect the value of the dollar. So far it hasn’t because investors from other countries view it as a “safe haven” relative to many other currencies. But it surely will happen eventually unless the deficits are significantly reduced. I don’t see that happening in 2012, an election year. I feel the rate of inflation will increase as a result.

    Therefore, well run Precious Metals miners with increasing profits are where I want to be in 2012.

    So my plan is to continue to buy select quality P. M. miners and “streamers” to protect the value of my dollars and grow the value of my stock portfolio.

    I don’t own SLV nor do I plan to buy it. But, based on the spot price of silver over the last 12 months, I don’t think buying or holding it is risky at all right now.

    Your statement, “Despite a eurozone crisis that is far from over (among other problems), owning gold now is even riskier than it was at the beginning of the year. SPDR Gold Trust (NYSE: GLD ) shareholders, you've been warned! (The same warning holds for investors in another precious metal via the iShares Silver Trust (NYSE: SLV ) , by the way.)” Just doesn’t “hold up” in the context of our Macroeconomic status/condition in the U. S., in my opinion, for 2012.

    Additionally, silver has many industrial uses that affect supply and price. It is basically, “A two for the price of one.” commodity and store of value.

    I applaud your “calling out” SLV by name. I like that in a person. It is an unambiguous sign of support for the Dollar and the U. S. government’s fiscal policy. I don’t share your view and will be taking the other “side” of the trade.

    I hope you have better results with your 2013 selections.

    Happy New Year !

    Fool On

    Sky Pilot

  • Report this Comment On December 30, 2011, at 9:47 PM, skypilot2005 wrote:

    On December 30, 2011, at 1:35 PM, mountain8 wrote:

    "If Paul is elected, the stock market will go down and the overall well-being of the US will go up.

    If anyone else is elected, I'm leaving the country.

    If Obama is re-elected I believe the Mayan prediction about dec 2012 will come true. It won't matter where I try to run to."

    Are you familiar with Paul's foreign policy positions?

    They are "Out there...."

    Sky Pilot

    Bachmann Supporter

    "It is time to elect a qualified woman."

  • Report this Comment On January 02, 2012, at 7:26 PM, Sunny7039 wrote:

    Tabulating "how many" you got right or wrong, as opposed to "by how much?" You are kidding, right? It's the effect the particular prediction has on one's total return for the year that matters, obviously.

    IOW, guessing wrong on bonds and right on small caps matters more to most people's portfolios than being sort-of kind-of right but also wrong on gold. Very few people put more than 10% (or should I say "bet" more than 10%) of their portfolios on gold and other precious metals. And having 3 to 10% in gold, silver, and other metals isn't unreasonable under most circumstances.

    I was astonished to find that my boring little cash stash in the Vanguard Short-Term Federal Bond Fund did as well as it did. This is what I use to judge risk premium relative to all my other investments and savings. This is going to be important going forward, since a lot of us will have a very substantial portion of our portfolios in cash and cash equivalents for a good part of the year.

  • Report this Comment On January 03, 2012, at 3:49 PM, AirForceFool wrote:

    I'm going to have to jump in on the side of skypilot here... my two cents anyway... I'm not completely sold on the timeline though... I have in the past assumed that the price of PM's would go up as the EU and other countries printed more and more money... but yet we haven't seen much in the way of inflation... how could this happen... I believe that markets can stay irrational for much longer than seems reasonable... I do believe that silver will be higher at the end of next year, but with the ECB coming online with some $400B+ in "loans", we may see the EU limp along for a couple of years... especially if they figure out how to do an orderly defaut/exit for Greece... it's very surprising to me how quickly folks are to count even the hint of hope as the greatest of news, but fail to see the fact that there is little chance of Ireland, Portugal or Spain pulling out of their tailspin... the global economy is slowing down big time... with economies stalling, folks are realizing that they can get by with a house that isn't 3500 sf. or a new car every other year. Greek debt to GDP is over 120% and expected to get worse... with the size of their economy, not really sure how Germany and France aren't going to be footing the bill for some time... but I digress...

    Personally I would offer 3-1 odds that the price of silver on Dec 31st 2012 would be higher than on Dec 31st of 2011. I think the real odds would probably be closer to 2-1 at best, but it would be worth the higher odds to be able to smack talk about winning a Fool Jester hat on a bet.

    Chris

    Disclaimer: current port is 49% cash/treasuries, 30% silver/gold/oil and 7% each in S&P/EAFE/Small Cap.

    I haven't quite got around to building the bunker yet though...

  • Report this Comment On January 03, 2012, at 3:51 PM, AirForceFool wrote:

    Sigh...

    "I do believe that silver will be higher at the end of next year..."

    "end of next year" being 2012...

    Chris

  • Report this Comment On January 06, 2012, at 4:10 PM, BOND66 wrote:

    If one of those clowns---Romney, Gingingrich or Paul---wins, we all should leave the country!

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