This past week in London, I had to chance to see and speak with a wide range of investment gurus including Jim O'Neill, Goldman Sachs' head of global economic research, super speculator turned leftist politico George Soros, and perennial free-market maven Steve Forbes. Each guru has a huge following and lot of credibility. Yet, each also represented very distinct, often contradictory views of the world. With an onslaught of so many competing opinions, it's easy to see how you can be overwhelmed by a constant state of "analysis paralysis."
Of Gurus and Predictions: Goldman Bullish on the Global Economy
Among all of the gurus I saw, it was Jim O'Neill's presentation that focused most on the present state and future prospects for the markets.
Amid all of the doom-and-gloom headlines, O'Neill's view on the global economy and China was surprisingly bullish. All of Goldman Sachs' projections for economic growth for the world's major economies for both 2009 and 2010 were above consensus. Goldman's own (re)calculation of the OECD's index of leading economic indicators suggests that the global economy is well into a "V" shaped recovery that began pretty much when the global financial markets turned up in March. In fact, O'Neill felt that many of the negative economic numbers coming from economies like the United Kingdom would be revised upward over the coming year. What he called his most bullish chart showed that German exports to Asia -- the biggest in the world -- had now not only recovered to pre-crisis levels, but actually had exceeded them. He also was bullish on the U.S. dollar, convinced that the shrinking U.S. current account deficit will lend continuing strength to the Greenback, fiscal nightmares notwithstanding.
Consistent with his previous public announcements, he was extremely bearish on Japan -- a "demographic disaster" -- and even suggested that the United Kingdom's economy could overtake Japan's economy in 30 years' time. And as optimistic as he was about the global economy, he didn't think that even the best-intentioned policy makers could do anything to prevent future financial crises. They are too much of a function of basic human fear and greed.
Of Gurus and Predictions: China Bear
Having coined the acronym BRIC (Brazil, Russia, India and China) eight years ago for the world's leading economies in the year 2050, O'Neill was predictably bullish on China. As he pointed out, over the past seven years, China created economic wealth equivalent to two United Kingdoms. When I hear the latest sound bites on China, I am always reminded of the text of an actual investment prospectus from the 19th century for a mining project in Peru: "The virtues of Peru are so well-known they need not be discussed here." No prizes for guessing how that venture ended.
Given how O'Neill's optimism about China contrasted with my own views that I expressed in last week's Global Guru, I challenged O'Neill on his optimistic scenario. Haven't statistics suggested that China is not getting much bang for its investment buck? He dismissed these statistics as flawed, and based on an overstatement of China's capital stock. What about the giant swathes of empty office towers, ghost cities and bridges to nowhere that dot Chinese cityscapes, I asked him? Not a misallocation of capital, he declared. The single-biggest factor that analysts underestimate in China is urbanization. Every empty office building that China constructs soon will be teeming with recently re-located peasants from the countryside. O'Neill clearly belongs to the "if we build it, they will come" school of thought.
While I am sympathetic long term to O'Neill's optimism, I also know that no single country has ever achieved sustained economic growth without enduring a series of gut-wrenching booms and busts. It is simply historically unprecedented. I also was surprised by his uncritical embrace of Chinese statistics. Perhaps I shouldn't have been. A senior Goldman Sachs economist criticizing the validity of Chinese government statistics would quickly end up on the front page of the next morning's Financial Times. It would certainly not improve Goldman Sachs' business prospects in the Middle Kingdom.
Of Gurus and Predictions: Analysis Versus Making Money
Gurus play an important role in keeping the world's finger on the pulse of financial markets. But it's important to understand that their role is more about providing you with novel perspectives than about necessarily putting money in your retirement account.
Consider the case of "Dr. Doom," NYU professor Nouriel Roubini, who has achieved great notoriety for predicting the economic meltdown. Ironically, Roubini never has claimed to have made any money from his own predictions. He recently hired 17 analysts not for the launch of a huge, multi-billion dollar hedge fund, but for his research company. But kudos to Roubini for knowing his limitations. As Steve Forbes once told me, "it's a lot easier to sell investment advice than to follow it."
I know several other world-class financial gurus who are willing to lend their names to hedge funds run by other people but recognize that they are terrible traders themselves. I once watched one such guru lose $50,000 of his personal money within a few minutes of trading on his Blackberry during my dinner with him. As luck would have it, he made the money back just as quickly -- when his Blackberry rang and he was offered a speaking fee for the same amount. Luckily, this guru recognizes his weakness and does not trade other people's money. In contrast, the single-biggest source of new accounts for my investment firm is another well-known guru who boasts non-stop about "being right" -- yet lost the bulk of his clients' assets in the recent market meltdown.
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In my own trading, I am comforted by the single-most important, yet counterintuitive lesson I have ever learned in investing: that analysis is the least important part of making money in the markets. Making sure you survive by not betting too big and by sticking to your stops is infinitely more important than getting your earnings estimate correct down to the last penny. And this lesson I learned from George Soros, a man whose political leanings I genuinely find perplexing, who observed: "My system doesn't work by allowing me to make valid predictions. It works by allowing me to recognize when I am wrong."
That's why knowing what you don't know can be the single-biggest secret of your long-term investment success.
Nicholas A. Vardy Editor, The Global Guru
P.S. Subscribers to Global Stock Investor know that they will be prepared to make money in global financial markets, whether they go up or down. My subscribers made big profits from the bull run in 2009. And they will make big profits on any potential collapse of global markets as well. The key is to have a flexible investment strategy. To find out our current range of picks, sign up for Global Stock Investor today.
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