Time To Become A "Gloom & Doomer"?

FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
January 16, 2007

IN THIS ISSUE:

1. Pessimists Abound This Time Of Year

2. My Early Indoctrination As A Pessimist

3. Direct Marketing 101 – Fear & Greed

4. Why I Said No (Be Sure To Read This)

5. So Much For The Gloom-And-Doomers

6. What About The Greed Crowd?

7. The Other Gary Halbert

Introduction

In my December 5 E-Letter and again in my January 2 E-Letter, I warned you about the plethora of New Year articles that would be touting the “Best Investments” or “Hottest Stocks” or “World’s Best Funds” or “Where You Must Invest Now” for 2007, and on and on. Long-time clients and subscribers have come to expect such sermons on avoiding such advice from me every year around this time.

I wonder each and every year why these types of articles work – and they must, or publications that spout them would not continue to do so. Also, I wonder why anyone would believe them – but they must, or otherwise the promoters would be losing so much money they would stop. And lastly, am I the only one who notices that these “Top Whatever” lists change about every time they come out, with no accountability for their prior “Hottest” lists? Only me, I guess.

The latest parade of “Top This Or That” lists and “Where To Invest Now” rankings have exceeded even my expectations in late 2006 and so far in 2007. I hope you have deposited such promotions in the proper place – the wastebasket – in my opinion. But that is not what I want to write about this week. I’ve warned you enough about such predictions that change with the wind each year, each quarter, or each month.

The title of this week’s E-Letter may sound odd to you, since I explained in last week’s issue how BCA had converted me from a “gloom-and-doom” adherent to one who is now more objective in my analysis and observations. Unfortunately, few of my former fellow gloom-and-doomers went through the same conversion, so all of us are still being inundated with all manner of reasoning for why you should be pessimistic and invest accordingly.

It seems as if there’s an avalanche of dire economic forecasts and gloom-and-doom predictions t in the media and in our mailboxes as we start the New Year. Sure, there are articles and stories about the Dow hitting new records, but you don’t have to look far behind them to see articles suggesting that a new bear market is just around the corner, that the economy is headed for disaster, and that numerous global threats are about to explode.

Because of the business I’m in and the number of publications I subscribe to (or used to anyway), I am on many mailing lists and Internet distribution lists. Thus, I see a lot of promotions each and every week, especially this time of year. What you may not know is that many of these marketing efforts use subtle “tricks of the trade” to entice unwary investors.

So this week, I would like to share with you some insights about how these promoters try to convince (or coerce) us into buying whatever they are selling, how they play on our emotions, try to hit our hot buttons, etc., and why their changing tactics must be working, or else they would stop.

As you read over these promotional gimmicks, it is important to note that this information also applies to articles that tout the “Hottest Stocks” or “Where You Must Invest Now” that I discussed in both my December 5, 2006 and January 2, 2007 E-Letters.

I would also like to share with you why I have never submitted myself, my company, or my services to this type of promotion, even though I have been approached and wooed by several direct marketing groups over the years.

My Early Indoctrination

Not long after starting my career in the investment business in 1976, I found myself with a small group of rather eclectic clients. I’m not sure how it happened, but when clients like you, they tend to refer their likeminded friends and business associates to you. When I say these clients (not all, mind you) were rather eclectic, I mean that they were very conservative politically (that was one reason they liked me), and they were also very much into the “conspiracy theories” that so dominated the 1970s and ‘80s and to a much lesser extent, even today.

By conspiracy theories, I mean the Trilateral Commission, the Council On Foreign Relations, the Bilderbergers, etc., etc. At the ripe old age of 24 in 1976, I bought into the conspiracy theories hook line and sinker – at least for a few years. I subscribed to all sorts of publications that claimed to track the conspiracy groups and expose their intentions. It was fun for a while.

[FYI, my early infatuation with the conspiracy theories ended after a few years when I concluded that: 1) all these powerful people around the world couldn’t agree on that many things over several generations; and 2) the quasi-socialism they supposedly desired would bankrupt their capitalistic businesses that made them so rich and powerful. So my interest in the conspiracy theories waned by the end of the 1970s.]

This same group of early clients (again, not all) was also of the gloom and doom mentality. They believed that the US was headed for a new Depression and financial crisis for a variety of reasons, ranging from deficit spending to moral decay to the plans of the conspiracy groups. This, too, was very easy to buy into for an impressionable 24 year-old. So in addition to the conspiracy theories, I was also indoctrinated into the gloom-and-doom mentality.

By mid-1977, I had subscribed to dozens of newsletters and other publications that focused on these negative issues, so it was no surprise that when I started my own newsletter in late 1977, I was not only a conservative politically, but also a gloom-and-doomer. What a combination!

This is a long introduction to say this: Because of all the newsletters and other publications I subscribed to a long time ago, I am still on a LOT of mailing lists. I see a lot of the promotional mailings, and now Internet promotions, that many of you probably get as well. There are some common threads among most of these promotions that are intentionally designed to play on our emotions and get us to subscribe and/or invest our hard-earned money. I will explain these common threads as we go along.

Direct Marketing 101

When I began my own newsletter in 1977, it was my hope that I could somehow expand my readership base to a large audience beyond my own clients at some point. In the late 1970s, I began attending conferences that were held by the editors of some of the most popular newsletters. Hundreds of people attended, or even thousands in some cases. But I was there just to make contacts and get exposure to the people that marketed these newsletters.

Over time, I did get noticed by some of the promoters. A number of them liked my writing style, and my low-key, educational, analytical approach. Yet they were a bit puzzled by the fact that I tended to quote other more high-profile sources, and give them the credit, rather than promoting myself as the “guru.” Several wondered how I had attracted a following of clients and subscribers with my low-key approach. Bottom line: they were mildly interested in me, mainly I think because I was different. Whatever the reasons, I was excited.

Then there was the question of HOW to market me. And that is where I got my real education into ‘Direct Marketing’ and finally why I never went for it. The first rule was that I had to be the “Guru,” not someone else, if I wanted to make it to the big-time. I had to be willing to allow them to promote ME as the ‘know it all guy,’ not someone else or my variety of good sources. It all had to be about me.

Second, they told me I had to make a choice, in addition to being the “Guru.” I had to choose between “fear and greed.” My promotions had to center on one of two things if I wanted mass marketing: 1) FEAR that the US economy and markets were headed to Hell in a handbasket; or 2) GREED and how much money you could make if you followed my advice, with all the wild claims that go along with that.

I should point out that if a financial writer chooses either one of these courses, he or she is locked into a particular path/identity that is not easily changed, especially if a big marketing group is committed to the campaign.

The point is, most of the promotions you see, whether it’s in your mailbox, on TV or on the Internet, are appealing to one or the other of your emotions – FEAR OR GREED – and most are offering the GURU solution, whether it be a product or an individual.

Acting on Fear or Greed is not the way to invest your hard-earned money, and Gurus (if there are any) are few and far between.

Why I Said No

As noted above, I have been approached several times over the years by promoters who wanted to mass-market my newsletter. While it was my hope early-on back in the 1970s and early 80s to become one of the newsletter big-timers, I could never accept the terms of the direct marketers, and here’s why, quite honestly.

First, I could never get comfortable with portraying myself as a GURU. I am not and never have been. In fact, I question whether anyone is a guru in our changing financial world. Either way, I don’t have the ego for it. I am, and always have been, a guy who is best at bringing my clients the views of others more accomplished than me, and then trying to put it all together.

This is the same reason I don’t manage money directly – I learned years ago there are professionals who can manage money and trade the markets better than I could. While we do create mutual fund portfolios for clients, we leave the day-to-day investment decisions to the fund managers.

Second, I refuse to reduce myself to a “fear or greed” analyst. The marketing experts seem to agree that you must identify yourself as one or the other, if you want to rise to fame. But I disagree, at least for me. I will not be a ‘fear guy’ like the gloom-and-doomers who predict year after year that we are about to fall off a cliff into economic and financial disaster. Likewise, I cannot be a ‘greed guy’ who promises you the moon based on unlikely scenarios.

I believe that you, as my clients and readers, deserve better than that, and that is what I have consistently tried to offer up over the years. My advice is not always right, but I hope you can appreciate my intentions. As a result, I have refused the offers over the years to mass-market my newsletter.

On that note, I would like to express my appreciation to InvestorsInsight.com, which publishes the Internet version of this weekly E-Letter. InvestorsInsight president, Mike Casson, came to me in 2002, and asked me to be a contributing editor to this weekly publication. To his credit, he has never edited a single word I have written. He has never placed any demands on me.

Honestly, there have been occasions when I have called Mike to ask his input on my writings, and his reaction has been the same every time: Gary, just be you – that’s what the readers want.

So Much For The Gloom-And Doomers

In my December 5 and January 2 E-Letters, I recommended that you disregard most of the New Year lists of where to invest now and the latest lists of “hot” stocks and mutual funds – as they change every year, and are basically worthless, in my opinion. But I also want to remind you that this is the time of year when the gloom-and-doomers come out of the woodwork. If your mailbox is not full of the doomsday predictions like mine is so far this year, consider yourself lucky!

The point is, these pessimists are out there every year warning you that the sky is falling, and that you should avoid the traditional investment markets, and advising you to invest in the non-traditional things they promote (and usually have an interest in) – no matter how wrong they are.

The gloom-and-doomers have been around ever since I got in the investment business in 1976. Their story is interesting; it captivated me for a few years when I was young, as noted above; but it has been a disaster. Thank goodness, The Bank Credit Analyst saved me as an investment analyst in late 1977, as I discussed in my January 9 E-Letter last week.

Just as BCA predicted in 1981/82, the US economy has enjoyed the greatest expansion in history over the last 25 years. The US stock market has experienced the biggest bull market in history over the same period, while interest rates fell to the lowest levels in over 40 years, which meant a huge bull market in bonds.

Yet the gloom-and-doomers missed it all! The gloom-and-doom crowd consistently told us the big bust was coming in the 1970s, then in the 1980s, then in the 1990s, and now it has to be the 2000s. I’m sure they were saying the same thing before I got in this business. To be fair, the gloom-and-doomers have some good points. They have some issues that should concern us all. And they probably will be right someday, maybe sooner rather than later.

My issue is, I believed they were right back in 1976 soon after I started my career. Thank goodness I got onto better advice back then and got off of the gloom-and-doom bandwagon. No promises, but I expect that same advice I have read and followed since then will tell us when in the future to jump back onboard with the gloom-and-doomers.

What About The Greedy Crowd?

Earlier, I discussed that both fear and greed are strong motivators used in marketing of investments, as well as many other products and services. While I dealt with the “gloom-and-doom” agents of fear above, you may be wondering what happens to those who succumb to greed’s siren song.

I have written in the past how some investment newsletter and e-letter writers publicize only their winning trades and not their losing ones. These individuals appeal to the emotion of greed by telling you how you could have had returns of up to 100%, 200% or even more. Of course, what they don’t tell you is that you could have also lost a bundle had you followed all of their recommendations.

Financial writer Mark Hulbert has followed the performance of most investment newsletters for a number of years. His Hulbert Financial Digest is highly recommended for anyone who is considering a subscription to an investment newsletter. Rather than believing the hype, Hulbert actually tracks all of the recommendations of over 180 investment newsletters and provides a detailed performance summary of each.

In a recent article, Mark Hulbert illustrated how destructive it can be to follow the emotion of greed when investing. Like me, Mark knows that many investors are wooed by the top performers of the previous year. He also knows that investors who chase performance often lag behind the market averages, but by just how much? Armed with his database containing years of detailed investment newsletter performance information, he set out to find an answer.

Mark constructed a hypothetical portfolio made up of the recommendations of each year’s top-performing newsletter. In other words, each year he would invest in the new recommendations of the top-performing newsletter from the prior calendar year. Investing on the recommendations of the top-performing newsletter from the prior year ought to result in some fantastic returns, you would think. Wrong!

What Hulbert found was that, over a period of 16 years of investing with the prior year’s top performing newsletter, this portfolio produced an average annualized LOSS of -24.4%!

The $25,000 hypothetical portfolio Hulbert constructed ended up with a value of just $1,526 over the 16 years he covered. Hulbert explains:

“The conclusion from these results should be abundantly clear: The strategies that are at the top of the one-year leader board are exceedingly poor bets for future performance.”

Oh, and for those of you who are of the “buy on the dips” mentality, Hulbert also ran a hypothetical portfolio of the worst performers from each calendar year. This investment proved to be even worse, producing an average annualized loss of -58.4%.

Conclusions

One thing that I want to make clear is that my no longer being a “gloom-and-doomer” does not mean that I think the economy and the markets will never experience bad times. The bear market of 2000 – 2002 showed us that is not the case.

What I’m trying to convey in this week’s E-Letter is that it’s important not to paint yourself into a strategic corner. You shouldn’t adhere to a gloom-and-doom mantra any more than you should exhibit a Pollyanna attitude that dismisses the warning signs pointing to economic or market downturns. Just as you shouldn’t be a “Perma-Bear,” you should also not be a “Perma-Bull.”

The economy and markets move in cycles, some are up and some are down. I have observed over the years that the effect of bad news often depends upon the market cycle we’re in. For example, I have seen some down cycles where any negative news seemed to worsen the descent, while in positive cycles, bad news was largely ignored. If you don’t believe that, just look at the stock market performance in 2006 in light of record oil prices, Fed rate hikes, nuclear instability, problems in Iraq, etc., etc.

Yet it’s entirely possible, and even likely, that some of the negative events and developments predicted by the gloom-and-doom crowd will actually come to pass at some point. When, we don’t know. What we do know is, it didn’t happen in the 1970s, the 1980s, the 1990s or thus far this decade. The point is, the gloom-and-doomers have been DEAD WRONG for decades, and those who followed their advice missed the greatest stock bull market in history!

Also, even if the gloom-and-doomers are correct at some point, the actual results in the markets may be very different from what the naysayers predict, as suggested above. That’s why I find it helpful to use the services of professional money managers who put emotions aside and invest based on their technical and systematic strategies.

If you have been one of the Perma-Bears, I hope I have convinced – at least somewhat – to join me as what I call an “Objective Observer.” For now, yours truly is still a positive Objective Observer as it pertains to the economy and the stock markets. The time is coming for us to switch to negative Objective Observers, maybe sooner than we think, but not now in my opinion and that of my trusted sources.

Of course, if you have a good chunk of your money managed by professionals that use active management strategies that can move to the safety of cash or “hedge” positions, you don’t have to be right on target in your assessment of where things are headed. I can help you get these professionals on your team whenever you are ready.

The Other Gary Halbert

Readers and prospective investors who are new to our services often type the name “Gary Halbert” into Google or some other search engine just to see what they find. Unfortunately, there is another Gary Halbert out there who dominates the Internet, at least for now. He is Gary C. Halbert. I am “Gary D. Halbert.”

I have struggled for years to combat the confusion between myself and this “other” Gary Halbert, who is apparently a prolific direct advertising copywriter and also runs in certain investment circles. If you search Google for “Gary Halbert” you will not find a link to me until you get to the second page of links; the previous links are all about Gary C. Halbert.

For the record, I am in no way related to Gary C. Halbert and am not affiliated with him in any way. Actually, we’ve never even met. We just happen to have the same first and last names. Therefore, when searching the Internet for information about me or my company, be sure to include the middle initial “D.”

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

What Congress can (and cannot) do on Iraq.
http://www.washingtonpost.com/wp-dyn/content/article/2007/01/15/AR2007011500970.html

The Plan To Silence Conservatives
http://www.aim.org/special_report/5160_0_8_0_C/

An advocate for Gore to jump into the race.
http://www.boston.com/news/globe/editorial_opinion/oped/articles/2007/01/16/another_chance_for_gore/