If you are of a certain age, you met Zoltar in the movie Big, when a boy fed a coin into a carnival machine, wished he were big, and woke up the next morning as Tom Hanks. It is a wonderful story. It is also, if you squint, the business model of a fair amount of Wall Street: put your money in the slot, and the man in the turban will tell you what happens next.
Every January the predictions arrive right on schedule. Year-end price targets, recession calls, the ten stocks to own for the decade ahead. The record of these forecasts is famously poor, and not because the forecasters are foolish. The job is impossible. There is an old line that economists have predicted nine of the last five recessions, and the reason nobody unplugs the machine is not that it works. We simply love to hear it talk.
So here is our confession, and we make it cheerfully: our crystal ball is a moving average. It has never once been wrong about where prices have been. That sounds like a joke at our own expense, and it is, but it is also the whole idea. The 200-day average does not guess where the market is going. It reads, slowly and without emotion, what millions of investors have already decided, and it puts one question to each of our eleven sectors: is this trend healthy enough to own, or broken enough to step aside from? No hunches, no headlines, and no fortune tellers.
Reading the past carefully turns out to have a much better record than predicting the future. In 2008 the market fell 55 percent from its peak. The rule, reading nothing but old prices, had already walked out of financials in the summer of 2007 and held the whole strategy to about a 15 percent decline. Run sector by sector through the Great Depression, the same discipline took roughly a quarter of the market’s pain. No coins in the slot, and no wishes required.
So the next time someone offers to sell you the future, remember that the machine only lights up because people keep feeding it quarters. Zoltar speaks. We don’t listen. We would rather hand you a ruler, a calendar, and every signal we have ever published. Your wish, as the machine likes to say, is granted.
John