Revealed: There Might Not Be a Huge Bubble Set to Explode (Our April Fool's Joke Explained)


It's time to come clean: We don't actually have a secret source in Davos, Switzerland, and we aren't producing batches and batches of Market Goggles.

Yesterday, April 1, was The Motley Fool's de facto annual holiday, and our special report, "The Hugest Bubble in History Set to Explode," was our April Fool's Day joke. We hope you enjoyed it. (Special thanks to the annoyed readers who, without realizing the day, wrote to chastise us over the word "Hugest" in the headline.)

Bubble, bubble, toil and trouble
With the S&P 500 wrapping up the first quarter at a record high, there are quite a few pundits, of course, who do believe we are experiencing a market bubble right now.

At the website Minyanville, an anonymous source talks of an impending credit crisis, and warns, "When the music stops, there will be no chairs." The economic forecaster Harry Dent is far more precise, and declares that we'll have another crash by this summer. And just last Sunday, David Stockman, President Ronald Reagan's former budget director, wrote, "When the latest bubble pops, there will be nothing to stop the collapse. If this sounds like advice to get out of the markets and hide out in cash, it is."

On the other hand, professor Aswath Damodaran, a valuation expert from New York University, recently attempted to value the entire stock market, and he came away thinking "there are good reasons why US stock prices are elevated." He notes that cash flows are high right now, and growth prospects are encouraging. After completing his valuation exercise, Damodaran intends to "stop worrying about the overall market and go back to finding undervalued companies."

So, are we in a bubble or not?

We have no idea. It's likely, however, that the pundits who are predicting a crash in the near future have no idea either.

How much does a chimp charge?
Philip Tetlock, a professor of psychology at the University of Pennsylvania, has studied the performance of pundits, and the results aren't encouraging. He found that forecasters performed no better than the "proverbial dart-throwing chimp," and he also discovered that "the more famous the expert, the less accurate his or her predictions tended to be."

Tetlock did learn that some pundits performed better than others. The better forecasters tended to be "self-critical, eclectic thinkers who were willing to update their beliefs when faced with contrary evidence." The less successful ones were more like our secret source: overconfident, persuasive, and committed to some big, overarching vision.

Insist on accountability
Motley Fool co-founder David Gardner has been talking a lot lately about how we must insist on everyday accountability -- whether it's on a stock pick or a market call -- from our financial media. Investors need to be able to know which financial predictions to value, and which ones to discard. That's why we should all insist on clear track records from financial pundits and forecasters, regardless of their experience or reputation.

In our April Fool's joke, we noted that our secret source had a great track record, though we didn't offer anything substantial to support that fact -- which should have been an obvious red flag. Another red flag: Our source drenched his forecasts in mumbo-jumbo, convoluted charts, and obscure metaphors (likening his forecasted bubble to the "Indonesian Rupiah crisis of '58").

Fortunately, our secret source's prediction that precisely three global banks will go kaput by April 17 will be pretty easy to track. We'll, ahem, report back in 17 days on how that call turns out.

Time to tune out
Investors might be wise to ignore financial pundits altogether. History indicates that most investors cannot consistently time the market. Motley Fool contributor Morgan Housel recently showed why investors cannot profitably jump in and out of the market on just the right days. Over long time frames, the worst trading days often occur during the same periods and same months as the best trading days. Do you really think an anonymous Swiss analyst can help you discover the correct entry and exit points? Can the television pundits do any better?

Many of us are still understandably scarred by the S&P 500's 37% decline in 2008. Those who exited the market during that year missed a 27% gain in 2009. And a 15% gain in 2010. Since the market's low in March 2009, the S&P 500 has more than doubled. In retrospect, the wisest response to the biggest financial crisis since the Great Depression might have been to do nothing.

There they go again
We might sound like broken records, but we believe the wisest investing strategy involves regularly buying shares of outstanding businesses for the long term. For many ordinary investors, our only edge is our ability to hold on to our shares when the market temporarily stumbles, and brings our companies down with it. Trying to match wits with the never-ending supply of pundits, forecasters, and ex-government officials is truly a fool's game. Never forget for a moment that they are all making money the old-fashioned way: via their speaking fees and book deals.

While we were trying to make a few important points about investing in our April Fool's joke, some of it was also just plain silly. Google Glass, for example, will likely be an amazing innovation. But it's very unlikely that Market Goggles will catch on anytime soon. And Hormel may well be a good stock idea with a tasty dividend. But we take back that line about Spam being tasty as well. (You couldn't pay us enough to eat its bacon-flavored Spam.)

As part of our joke this year, we also created a fake job ad for a "Deep Thinker." The prospective hire was supposed to come up with big ideas, and was only allowed to go online once a week. This role underlines a great takeaway from this year's joke. We all need to do a bit more thinking, while paying a lot less attention to the constant market chatter on television and the Internet.

Warren Buffett once said you should only buy "something that you'd be perfectly happy to hold if the market shut down for 10 years." That sounds like great advice to us. Imagine all the time and energy we could all save by not worrying about collapsing bubbles that may or may not lead to a financial catastrophe. Life is too short to be getting stressed out by an anonymous Swiss analyst.


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John Reeves and Ilan Moscovitz both own shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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