Of Subway Tokens and Stock Market Forecasts

I rode the New York City subway system for many years. Along with many of my fellow “straphangers,” I experienced the unique sights, sounds and smells (!) of Gotham’s underbelly. When I first moved to the City, we could buy subway tokens, metal slugs really, which we could use to enter the turnstiles. I remember as if it were yesterday how some enterprising young men figured out a way to retrieve tokens from the payment slot on the turnstile. One of these underground entrepreneurs would simply place his mouth on the token slot creating a near-perfect vacuum, suck really hard (I am not making this up!) and viola! – he would be the owner of a fresh (hardly), shiny (rarely) NYC subway token worth about $1.50 at the time. I suspect that these clever lads would do this multiple times and either sell these purloined pennies to hurried commuters or cash them in at the token booths.

Anyway, one of my mentors, after a long discourse about his views on this topic or another, would often end the discussion with “well, that (his opinion) and a token will get you on the subway.” It was his somewhat humorous, very self-deprecating way to highlight that sometimes an opinion about the capital markets is not worth very much. I have often wondered why anyone would think this way.

Perhaps it is because there are so many opinions about the markets (oversupply can depress pricing). Perhaps it is because investors would really like someone to tell them what is going to happen and this creates big demand for forecasts and predictions. Again, creating the oversupply of viewpoints we see out there. Perhaps it is because the uncertainty inherent in the capital markets makes a correct opinion such a rare and wonderful thing that people feel richly rewarded for either making a prediction which proves to be correct or for following a successful prediction. Still, I suspect that at some very basic, honest level, most forecasters fully understand the large margin of error attached to their predictions.

So what’s the point of all of this? Despite all the commentary about uncertainty and the difficulty of making accurate predictions, I am still amazed at the sheer number of forecasts which cross my desk on a daily basis. In the newspaper, on TV, in research reports, mutual fund monthlies, webcasts, Internet sites and so forth – I am constantly bombarded by these “experts” and their “expert opinions.” For fun some times, I will try to match up two of these arguments (presented by intelligent, experienced commentators, of course) which are mutually exclusive and exactly opposite from each other. One of these must be wrong…

Many times, these forecasts consist of a series of events. For example, the US Treasury is providing a great deal of liquidity, and this will eventually lead to inflation, and this will depress the value the US dollar, therefore buy Chinese stocks. Regardless of the logic, flow and validity of such a forecast, because it requires so many events or trends to result from the previous ones, its fruition is much like calling a flip of a coin correctly six times in a row. It can happen, but its likelihood goes down with each additional forecast added to the mix. These serial forecasts rarely can accommodate exogenous shocks (Black Swans, if you will) that often determine the trajectory of the markets.

While I am somewhat entertained by all these capital market forecasts, I rarely rely on them for little more than gauging where the consensus is. My efforts are highly focused on measuring value and determining the context of these measurements. I understand that extreme levels in the things I can measure (sentiment, cash levels, volatility, valuation, etc.) can often signal an inflection point. Did I predict the market’s turn in March? No, I don’t make predictions. Am I surprised by the market’s rise since then? Not really, my measurements suggested some huge imbalances in a number of indicators at that time. Will the rally continue? I am not sure (I don’t make predictions). Am I still fully invested? Yes. I can still find a large number of stocks with very attractive valuations. I suspect my enthusiasm for the market will continue until these kinds of bargains become harder to find.