Investors are always on the lookout for the next Guru . That special someone who has the market figured out. I can tell you it's been going on since time began.
So what should we look for in a Guru? Usually they are men. Often young men. Almost all Guru's think the way to beat the market is with a very high success rate. When a Guru gets on a hot streak they almost always want the world to recognize their ability. This is where the peacock dance and chest beating come into play as they proclaim to the world their superiority over the masses. If their streak lasts for a while they will gather quite a flock of sheep to lord over. Invariably they come to believe that they have in fact mastered the markets.
History is full of these Gurus, some of them legendary. Unfortunately history is also full of the broken bodies of Guru's whose system quit working and they didn't see it coming.
I've got news for you. No matter what Guru you follow, what system or indicator or technical analysis you use, it will eventually quit working.
Whenever something starts to work too good the market will discount it and it will stop working. The more popular a Guru becomes the shorter his lifespan usually is as the market will start to fade him. A good example is CNBC's Jim Cramer.
I have to shake my head when I see investors touting this or that system. Usually they can point to an impressive record of calls as proof that their particular Guru or system is the only system for making money in the market. If these people had actually studied history they would know that when any system starts to produce amazingly accurate returns then you are getting close to the top.
Examples are everywhere. Look at the tech bubble in 2000. At the time it was obvious that we had achieved a new paradigm shift and tech stocks would continue higher forever, earnings or no earnings. We have the same picture in real estate in 05 and 06. It was obvious to all that we had a shortage of available land and an excess of population. If that wasn't a combination for ever higher real estate prices I don't know what is. Recently it was oil. The world had reached peak oil and everyone knew we would never see $100 a barrel again. This theory while it sounded very plausible as oil was hitting $147 may have had a leak or two in it. The collapse of commodities recently took down oil Guru Boone Pickens when he failed to recognize in time that the assumptions he had based his investing on weren't entirely valid.
We can find similar examples with indicators that suddenly fail to work like Joe Granville's On Balance Volume indicator. For a while back in the 70's Joe had a hot hand. When Joe spoke markets moved. I guarantee you that any system, whether it be the COT, cycles, technical analysis, pattern recognition or following the latest Guru's prescient calls is destined for failure once it becomes too popular. As a matter of fact once a system starts working really well you would be best to become very nervous.
There are ways to become rich in the market. One of them is by compounding over a long period of time. Another is to get in a the beginning of a secular trend and hop off at the top. We've just seen how hard that is to do as many investors got caught in the commodity collapse.
I can almost guarantee you the way to get poor in the market is to follow a system or guru with a very high success rate. It sounds counter intuitive doesn't it? The problem with having a very high success rate is that we become convinced that we have in fact discovered a way to beat the market and we start to bet too big. So that when the market decides to take away our system or kill our Guru we quickly lose all of our hard earned profits.
I invariably see the hot Guru's talk about "betting big". Once you start seeing those kind of statements you know your Guru's life expectancy is short.
2018 New Year - Looking Behind and Ahead
2 weeks ago