What Greece Can Teach You About Investing

US News

I pay a lot of attention to financial news. Most of it involves predictions about the future of the stock markets. For example, this week I read blog posts about whether municipal bonds are likely to default, "betting" on gold, whether investors should buy or sell stocks and the advantages of buying high dividend stocks, among many others. In a remarkable turnaround, Nouriel Roubini, better known as Dr. Doom, is now advising investors to buy stocks, while predicting a day of reckoning in two years.

The theme of all these posts is the same: The author believes he has a special insight into the future, and that his advice is worthy of serious consideration by less informed investors.

Jim Jubak is one of the people who dispenses advice about the future with great confidence. On September 22, 2011, Jubak wrote a blog post for MSN Money. The subject was Greece, and Jubak was attempting to predict when (not if) Greece would default on its sovereign debt. He reached this conclusion: "The self-interest of Germany argues for a relatively early default. Not December, but in the first half of 2012. The self-interest of Greece argues for a somewhat later default. Say, halfway through 2012 or a bit later. But both point toward 2012."

He was not alone in this view. On September 11, 2011, Abigail Moses at Bloomberg.com quoted hedge fund founder Peter Tchir, stating: "Everyone's pricing in a pretty near-term default and I think it'll be a hard event."

Why investors would rely on the predictions of hedge fund managers remains a mystery to me. Hedge fund performance, as measured by the HFRX (which is used to measure industry returns), has significantly underperformed the S&P 500 index for the past decade. This year hardly marks a recovery. According to Goldman Sachs, the average hedge fund has returns of 5.4 percent year-to-date compared to 15.4 percent for the S&P 500 index.

So what happened in Greece? There was no default. The economic news continued to be very bad. As noted by Chris Martenson, its GDP shrank by 12 percent in 2012 and is continuing to fall this year. Unemployment has risen to an appalling 27 percent.

You might assume investors in the Athens stock market have been clobbered. You would be wrong. That market is up 80 percent in the past year. Greek bonds have also skyrocketed in value. Interest on the 10-year Greek government bond has fallen from 30 percent in 2012 to 10 percent today. Raise your hand if your broker or adviser told you to buy Greek bonds in early 2012.

Here's the lesson you can learn from Greece. Markets are random and unpredictable. Investing based on the musings of financial pundits is gambling and speculation. The expected return of speculation is zero (or less after costs). Ignore the financial media when it disseminates news about market timing, stock picking or fund manager selection. Their advice is no more reliable than a monkey throwing a dart at a board.

Dan Solin is the director of investor advocacy for the BAM Alliance and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His latest book, 7 Steps to Save Your Financial Life Now, was published on Dec. 31, 2012.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

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