Wednesday, August 26, 2009

Follow Roubini or catch the rally?

Bloomberg examines the trade off between following the economic forecasts of Nouriel Roubini and catching the recent rally in US shares.

Has keeping up with Roubini's insights meant that you've missed the rally? More from Bloomberg:

"Making money on the thinking of
Nouriel Roubini isn’t what it used to be.

The New York University professor, who in 2006 foretold the worst financial unraveling since the Great Depression, has yet to say the economy is worth investing in again. “There is a big risk of a double-dip recession,” wrote Roubini, also known as Dr. Doom, in his column in the Financial Times this week.

Anyone attempting to apply Roubini’s wisdom to stocks may be forgiven for missing the biggest rally since the 1930s as the Standard & Poor’s 500 Index climbed 52 percent in six months. While Roubini said in March the advance was a “dead-cat bounce,” that it may “fizzle” in May and warned in July that the economy’s “not out of the woods,” the MSCI World Index was posting a 58 percent gain, the largest since it began in 1970."

So I've been hearing a lot of this kind of chatter (often directly aimed at Roubini) since the rally in stocks heated up this past spring.

That Roubini was on record on March 9th saying that the S&P 500 might head back down to 600, the very day the market made its low in this current cycle, is
(for some) enough to fuel scorn for his opinions.

But, as others have pointed out, Roubini is an economist and the market is not necessarily the economy, and vice versa. In this particular instance, Roubini may be wrong, whereas earlier he was lauded for his prescient views on the dangers lurking within our financial system and in the stock market. No one is right 100% of the time.

Maybe the lesson here is to seek counsel from many, decide what's relevant, and incorporate that info (where useful) into your own plan and investing/trading methodology.

If a respected economist's views are likely to carry enormous weight over your investing decisions, you may need to reformulate your strategy to take advantage of your strengths and what you know, while accounting for (and protecting against) what you don't know.
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