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Confessions of a Money Manager: Don't rely on conventional wisdom

Ray Unger  —  8/22/2008 3:45 pm

When I opened up Saturday's Wall Street Journal, I was floored by the headline, "Dollar's Rise Could Damp Inflation." Wasn't it just a month or so ago that the conventional wisdom of the economists and pundits alike was that the dollar was dead? Now its rebound has those same sages spinning stories about its recovery.

Now if you think I'm taking a potshot at so-called conventional wisdom, you're right. It just seems that when so many TV talking heads tell us the same story about some economic issue -- with minuscule variations -- that we should take a step back instead of accepting this "wisdom" hook, line and sinker.

But I'm not the only one taking potshots at conventional wisdom. My Wayzata, Minn., money-manager friend Dick Perkins hinted that making wise pronouncements can be a tricky affair. He invoked the lyrics of Doris Day's hit song from the 1956 movie, "The Man Who Knew Too Much:"

"The future's not ours to see/Whatever will be, will be/Que Sera, Sera."

Nonetheless, the experts keep churning out conventional wisdom about this and that and we listen intently. That's human nature, I suppose: we want to know what everyone else knows so we can be "in the know."

Although I don't often go out on a limb about offering conventional wisdom, I have made a few right calls -- but only in defense of some traditional concepts that refute the wisdom du jour. The notion of investing a portion of grandma's retirement account in gold bullion or oil futures is an example. Yes, the price of gold and oil are off sharply from their highs (gold is off some 18 percent from its high of $1,000 an ounce, and oil is down roughly 21 percent from its high of $147 per barrel) but price weakness is not the main reason to avoid such investments. The real reason is that commodities don't pay dividends and never will. Grandma shouldn't be a speculator.

One of the great ironies of conventional wisdom is that those who go against it, and turn out to be right, receive the greatest accolades. Take Meredith Whitney, for example. She works for New York-based brokerage firm Oppenheimer as a bank analyst. Last October she bravely -- and brazenly -- predicted that global financial giant Citigroup would soon be hemorrhaging billions from failed sub-prime mortgages. Likewise, she predicted the same fate for Bank of America, Lehman Brothers and UBS. The rest is history. For her unconventional predictions she was on the cover of Fortune magazine's Aug. 18 issue.

Last October she was absolutely right. What is she saying today? That's the irony. As of now, Meredith's views on the financials ARE the conventional wisdom. The vast majority of bank analysts are now preaching from the same choir book -- doom and gloom despite a $1.9 trillion collective downgrade of mortgages in the industry.

So let's see where we're at with one of Meredith's predictions: Citigroup. Last October Citigroup was selling in the mid-to-high $40s and its dividend was $2.16 a share ($.54 per quarter). Today, Citigroup's stock (C $17.50) is off some 60 percent from those levels and cut its dividend to $1.28 ($.32 per quarter). By any stretch, investors in Citigroup are hurting. Will it be another Bear Stearns and fall to almost nothing? Good question.

Today's headlines, however, are not on Citigroup. All eyes are on Fannie Mae (FNM $4.15), and Freddie Mac (FRE $2.92). I can't understand why, since both are fait accompli disasters. Both stocks traded in the $60-$70 range last fall and both are now a step away from receivership, bailout or massive dilution if they sell new shares. In essence, today's conventional wisdom on the financials is already reflected in the market.

So what do we glean from this exercise? It's that the price volatility we've experienced in the last few months -- the likes of which has not been seen in quite some time -- is past us. The horse has left the barn and no amount of hand wringing will change that.

It seems apparent that the market's downward trend has begun to change. On July 15, the Dow Jones slumped to an interday, and year-to-date low of 10,731.96. Since then we've seen a great deal of volatility but no new low. And why should it? After all, the financials in the Dow Jones are really scraping the bottom; American International Group, American Express, Bank of America, Citigroup and JP Morgan Chase have lost billions in market cap. The other Dow components, with the exception of General Motors, however, have reported very respectable earnings, and their stocks are also down.

Today's conventional wisdom on the financials, and the market, is obviously quite negative. That being the case, we're likely to see more bumping along the bottom. But the next market move -- albeit not very soon -- will be up. So don't be afraid to go against today's conventional wisdom, and buy a few shares of market index funds.

Ray Unger is chairman of Forward Investment Advisors in Madison. He can be reached at 833-9400.

Ray Unger  —  8/22/2008 3:45 pm