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Random Short-Term Markets

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There’s no shortage of financial soothsayers out there selling their wares. Some of their sales tactics are relentless. I know because my customers tell me. I also read until my eyes feel like they’re about to fall out of my head. The sheer magnitude of news and financial data to dig through daily is simply breathtaking; therefore, your ability to quickly separate the wheat from the chaff is an absolute must. It’s not taught in a book—it’s more of an art than a skill. Some of the best investment advice or comments can come when you least expect them. Last week while teaching my kids how to play Monopoly, my daughter asked: “What happens when the bank runs out of money?”

And sometimes the most recognized names can throw you off track. Burton Malkiel, author of A Random Walk Down Wall Street, offers up timeless advice, like the importance of diversification. But what about some of his op-eds? Like the one in last week’s Wall Street Journal, where he makes short-term predictions about where to put your money in 2012. Much of it is good—especially when he writes not about stock predictions, but about emerging market demographics:

Demography also favors the emerging economies. Dependency ratios (nonworking age to working age population) are far more favorable in emerging markets. Soon Japan will have as many nonworkers as workers, and Europe and the U.S. are not far behind. Emerging markets, such as India and Brazil, will continue to have two to three workers for every nonworker. Even China, with its one-child policy, will have favorable demographics and a large potential labor force until at least 2025. Countries with younger populations tend to grow faster.

But, a couple of years ago, in late 2010, Malkiel recommended overweighting China. The following year, last year, China’s Shanghai index lost 22%. Here’s what he wrote last week:

Much worry has been expressed about real-estate prices and construction activity in China. “It’s Dubai times 1,000,” says one hedge-fund manager who predicts an economic collapse. Obviously, an end to China’s growth would be a significant blow to the world economy.

But parallels to the U.S. real-estate bust and the resulting damage to the economies and financial institutions of the Western world seem unwarranted. The absorption of vacant space remains extremely high in China, where hundreds of millions more people are expected to move from farms to cities. And unlike the U.S., where people bought new homes with little or nothing down, Chinese buyers make minimum down payments of 40% on a new home (and 60% on a second home).

 

Malkiel has a fine axe to grind, trying to sell more copies of his latest edition book and trying to prove he’s been right all along. Unfortunately, it’s the followers of his short-term soothsaying who lose money hoping to bank on his advice. To their dismay, they likely don’t have royalties or book sales to fall back on and lost real dollars when China’s market lost over a fifth of its value.

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E.J. Smith

Editor-in-Chief
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com.

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