Wall Street loves its "contrarians." And the pundits who prevail in high-profile bets against the crowd can often parlay the fame into fortune as well. The reason for their outsize influence is understandable enough. Most investors assume that the big bet was the result of rare insight or a better understanding of events and latch on to these seers' future recommendations.
But investors should think twice before blindly following all their later proclamations. Indeed, going with the flow may sometimes be smarter than betting against the crowd. Rather than any profound insight, the contrarian pundit du jour may simply have a tendency to go out on a limb instead. And while their bold, correct calls tend to generate plenty of fanfare, their advice may generally fall short.
A study of economists, for example, found that those with a better record for predicting extreme events had a worse overall record, according to The Boston Globe.
"The analyst with the largest number as well as the highest proportion of accurate and extreme forecasts had, by far, the worst forecasting record," the authors wrote. While they tend to be celebrated as prophets, these high-profile analysts may be closer to one-hit wonders instead.
Twice as Often Wrong as Right
And there's no shortage of pundits who shot to fame on the back of a bold call only to come up empty afterwards. Take Meredith Whitney. The once-obscure banking analyst was among the first to warn of the financial crisis that was brewing even as most remained complacent. The boost was enough to allow Whitney to strike out on her own.
But her performance has been lackluster since. A Bloomberg analysis tallied her with only six accurate stock forecasts compared to 13 inaccurate ones as of the middle of last year. And she made the right call on only 37% of the 81-company S&P 500 Financials Index.
Whitney is now back in the headlines calling for a meltdown in the municipal bond market. But investors should keep in mind both the good and the bad calls when deciding how much credence to put in her latest forecast.
Whitney is far from the only pundit to be showered with accolades for calling the crisis only to stumble later. New York University economist Nouriel Roubini (pictured above) became a household name for forecasting the Great Recession while most others were whistling past the graveyard.
Ooops and Ooops Again
But he has had plenty of big misses since. In 2008, he predicted a major hedge fund meltdown that never materialized, The Boston Globe notes. He called for oil prices to stay below $40 during 2009 due to anemic demand but they spiked to $80 at the end of that year. Perhaps most notably, Rubini called for the S&P 500 to fall below 600 in the March of 2009. It surged 23.5% that year, the steepest gain since 2003, to close at 1,115.
Gluskin Scheff chief economist David Rosenberg was also early to sound the alarm on the financial crisis. But Rosenberg has taken plenty of flak for being far too bearish about the recovery since and continuing to forecast gloom.
And Peter Schiff of Europacific saw his star rise after predicting the crisis even as other pundits remained glib. But Schiff has been anything but prescient about the recovery. And despite an enormous body of evidence, he insists that the economy is in worse shape than in 2008 and on the verge of a depression because of government intervention.
Given the possible fame and fortune it can generate, going against the grain in a big way is a gamble that makes sense for plenty of aspiring pundits. Blindly following their subsequent advice, though, may not make sense for most investors.