Cerebral Whiplash

For many years, Scott Burns wrote a nationally syndicated financial column for the Dallas Morning News. Scott retired at the end of January, and his column was turned over to Professor Laurence Kotlikoff, an economist at Boston University. At first glance, the change seemed reasonable.

Mr. Burns was known for his rational, science-based approach to investing. He believed that, in aggregate, investment markets are efficient. Burns advocated creating long-term well-diversified portfolios for each investor's needs and tolerance for risk. He called his approach “Couch Potato” investing.

As recently as December 14, 2016, he wrote a column that defined a “Couch Potato” investor as“…someone brave enough to admit that he or she doesn’t have a clue about the future…” and reiterated that it’s “…constancy, not timing, that beats markets.”

In both his writings and several interviews with him, over my many years on the radio, he has always maintained that the future is unpredictable. A seemingly rational belief given that there is not one iota of evidence that anyone has done so. There are certain truths: the Earth is spherical, and the future can’t be known.

As Scott rode off into the sunset in his vintage Airstream trailer, Professor Kotlikoff penned his first polemic entitled “Why you should get out of the stock market – now,” leading to numerous cases of cerebral whiplash around the country. I was one of his victims.

Strangely, the column started off well. The first two sentences made eminent sense: “Smart economists never predict the stock market. Our theory tells us that it's impossible.” So far, so good. Most academics (along with anyone possessing a modicum of common sense) are in agreement. He probably could have taken it even further and said something like, "smart people never predict the future."

Had Kotlikoff ended the article after the first two paragraphs, there would have been no controversy. He didn’t. In the third paragraph, he is either questioning his own veracity or purposely trying to incite “bait-click” controversy by asking, “So why would a card-carrying economist like me predict a stock market crash and tell you to get out of the market if you own individual stocks or move your 401(k), IRA and other retirement account stock holdings into something very safe, like short-term government bonds?”

Yes, why would you? One word: Trump! Professor (and erstwhile pretend presidential candidate) Kotlikoff hates President Trump. Without getting political, he isn’t the only one, but presidents don’t have that kind of power. Kotlikoff tries to obscure his emotionally driven bias by tossing out a few facts about the Dutch Tulip Mania of the 1630s, then pivots away from that spurious parallel when he states, “Today's stock market is not yesterday's tulip market.”

Other than his anti-Trump tirades, the only argument he makes for his advice to “Sell your stocks and your long-term bonds, too, until the dust settles,” is his belief that stock prices are “at an all-time high.” Uh, wait a minute, stocks have been at all-time highs thousands of times of the past 100 years. If investors sold every time stocks rose above their previous all-time high, they would be out of the market more than they would be in. That’s a formula for guaranteed failure.

Yes, stock prices around the world are higher than they were at some point in the past. That’s because the crazy global economy just keeps steadily growing – as it has for thousands of years. Yes, stock prices will go down someday. A lot of “experts” thought that would happen in 2009, 2010, 2011, 2012, 2013… (you see where I’m going with this). They were wrong. Eventually, someone will accidentally get it right, and the market will fall, for a while. That lucky soul might even be Professor Kotlikoff.

After providentially guessing a market downturn correctly then comes the real test of prognosticative “skill;” accurately predicting when stock prices have stopped falling and are poised to rise again. Statistically, someone who guesses correctly once has less than a 1% chance of guessing right again. If you’re willing to play those kinds of odds, stop investing and take up blackjack.


After this column was written, Scott Burns reached out to me saying "All-or-None Investing, like All-or-None Thinking, doesn't work. I doubt Larry [Kotlikoff] will do anything like that again."  

While I have not read a retraction, nor heard of any contrition on the part of Professor Kotlikoff, I hope Scott is correct in his belief. While everyone is entitled to an opinion, misguided missives from academia hurt investors more than they help them.

Don McDonaldComment