Today’s comments by Nouriel Roubini that there might be “light at the of the tunnel” are really only notable because of who is saying it. Roubini is one of several star economists/analysts that have come out of the recent crisis. Meredith Whitney and Nassim Taleb are two others that come quickly to mind.
Its funny how short the media’s (and the investing public’s) memory is. Both seem to want to find the analyst who has it all figured out. As though someone actually has the proverbial crystal ball. Every cycle the media finds the people who called the big move correctly. Today its Roubini and Whitney. But 10 years ago it was Henry Blodget and Mary Meeker.
Think about what made someone like Mary Meeker a star. She basically got one big call right: that not only the internet was going to change the world, but that it was also going to capture the imagination of investors. Whether or not you could say she called the formation dot.com bubble, she certainly had a good vision on what was driving the moment.
But when that moment passed, did the Mary Meeker’s of the world see it coming? Not really. I mean, we know Blodget poked fun at some of his own calls in those infamous e-mails, but I would argue that most of the star dot.com analysts believed in the internet, even if they didn’t believe in all the specific companies involved.
Now bear in mind, there is a feedback loop here. You make a bold call, it works, you get interviewed on TV, you get a huge pay raise, every one calls you a genius. Its heady stuff. Check out Henry Blodget’s rapid rise on his Wikipedia page sometime. When you parlay a great call on Amazon.com into your dream job, isn’t there some psychological impact there? On some level, wouldn’t you start to think to yourself, “Gee, when I tell every one to buy, all sorts of rewards come my way. All the guys saying ‘sell’ are looking for work.”
These analysts understood what was going on in the market and in the economy at a specific moment in time. They were smart people, to be sure, but they didn’t have some sort of transcendent understanding of markets. They just had a better feel for that market, that mentality, than anyone else.
I don’t see how someone like Meredith Whitney is all that different. She had a better view on banking than most, and she deserves all the credit for that. But let’s not pretend like she is the next guru who truly understands banking above all others. Every story about her is prefaced by saying that she “predicted” the financial crisis. But really, does she know more about banking than people like Richard Bove? That guy apparently liked Washington Mutual (WAMUQ.PK) stock in May 2008, according to one story I pulled up off a web search. Is he an idiot and Whitney a genius? It isn’t all that simple is it?
My problem is that investors aren’t really served by this deification of people who have gotten the short-term calls right. Professional traders will tell you they make about as many bad trades as good, you just try to set it up such that your good trades pay off more than your bad trades lose. But the media doesn’t teach this lesson. Instead, they implicitly tell you that Nouriel Roubini has it figured out. That if only you had listened to him, your 401k wouldn’t have dropped by half. Hell, CNBC often teases their interviews with stuff like, “Coming up, the analyst who called the banking crisis! See where she says the market is going now!”
It isn’t about finding smart people. The guys on the CDO-squared desk were smart too. The guys who dove into the dot.com bubble were smart too. Alan Greenspan was a smart guy, and he seemed to have as good a grip on markets as anyone… until he didn’t.
Take an analyst’s good call for what it is. A good call. Nothing more.