This column, which is the first in a series of three, first appeared on Real Money Pro on Jan. 6.
"Never make predictions, especially about the future."
-- Casey Stengel
It's that time of the year again!
By means of background and for those new to Real Money Pro, 11 years ago, I set out and prepared a list of possible surprises for the coming year, taking a page out of the estimable Byron Wien's playbook, who originally delivered his list while chief investment strategist at Morgan Stanley, then Pequot Capital Management and now at Blackstone.
It takes me about three weeks of thinking and writing to compile and construct my annual surprise list column. I typically start with about 40 surprises, which are accumulated during the months leading up to my column. In the days leading up to this publication, I cull the list to come up with my final 15 surprises. (This year I include five also-ran surprises).
I often speak to the wise men and women in the investment and media businesses who give me some ideas. (This year I wanted to specifically thank Steve Einhorn and Lee Cooperman at Omega Advisors and The Lindsey Group's Peter Boockvar for their input.)
I have always associated the moment of writing the final draft (in the weekend before publication) of my annual surprise list with a moment of lift, of joy and hopefully with the thought of unexpected investment rewards in the New Year (e.g., Altisource Asset Management (AAMC), my stock of the decade for 2013, spiked up by 1,200% during the year). This year is no different.
Above all, the publication of my annual surprise list is recognition that economic and stock market histories have proven that (more often than not) consensus expectations are off base.
Abba Eban, the Israeli foreign minister in the late-1960s and early-1970s once said that the consensus is what many people say in chorus but do not believe as individuals. GMO's James Moniter, in an excellent essay published several years ago, made note of the consistent weakness embodied in consensus forecasts. As he put it:
[E]conomists can't forecast for toffee.... They have missed every recession in the last four decades. And it isn't just growth that economists can't forecast; it's also inflation, bond yields, unemployment, stock market price targets and pretty much everything else.... If we add greater uncertainty, as reflected by the distribution of the new normal, to the mix, then the difficulty of investing based upon economic forecasts is likely to be squared!
My Surprises for 2013 Generally Proved to Be Wrong-Footed
"How'm I doin'?"
-- Ed Koch, former New York City mayor
While over recent years many of my surprise lists have been eerily prescient (e.g. my 2011 surprise that the S&P 500 would end exactly flat was exactly correct), my 15 Surprises for 2013 failed to achieve the successes of the past few years.
In fact, my surprises were way off the mark last year. I needed a lifeline, a call to a friend or a do over.
As we entered 2013, most strategists expressed a cautious but constructive economic view of a self-sustaining domestic recovery, held to an upbeat (though not wide-eyed) corporate profits picture and generally shared the view that the S&P 500 would rise by between 8% and 10%. (A year ago the median S&P forecast for year-end 2013 was only 1550, according to Bloomberg; the closing price in 2013 was 1848.)
Those strategists proved to be correct on profit growth (but only because of several non-operating factors), were too optimistic regarding domestic and global economic growth and, most importantly (as I did), grossly underestimated the animal spirits that resulted in a well above historic increase in P/E ratios that buoyed stock prices to their largest annual gain since the mid-1990s.
Many readers of this annual column assume that my surprise list will have a bearish bent. But I have not always expressed a negative outlook in my surprise list. For example, two years ago, my 2012 surprise list had an out-of-consensus positive tone to it, but 2013's list was noticeably downbeat relative to the general expectations. I specifically called for a stock market top in early 2013, which couldn't have been further from last year's reality, as January proved to be the market's nadir. The S&P closed at its high on the last day of the year and exhibited its largest yearly advance since 1997. (I steadily increased my fair market value calculation throughout the year, and, at last count, I concluded that the S&P 500's fair market value was approximately 1645.)