Smart People can be Wrong

[masayako]

bgates,

For what it’s worth (also, not much), I want to tell you I appreciate your post. It makes sense to me.

Masayako

[Anonymous]

nancy_s
i read most of these posts and haven’t noticed what you’re talking about. which posters do this? i’m curious.
i agree with gates, the dogma gets laid on pretty thick here at times. lots of underinformed ranting and raving masquerading as informed opinion.

[powayseller]

bgates, are you referring to me saying, “I am 100% certain that this asset bubble will revert to its mean” Fascinating, it you have any doubts it will….Anyone who believes this asset bubble will not revert to its mean is clearly delusional. But hey, it’s different this time, it’s San Diego, we’re running out of land, the air is great, the sun always shines, the Fed will save the housing market…

San Diego’s housing bubbles go back t the late 1880’s. Read on :
“It was the coming of California Southern’s trains in 1885 which touched off the Great Boom of the Eighties. Buildings spread over the landscape, with “gingerbread” at every turn. San Diego’s population rocketed up to 40,000 in 1887. The price of downtown lots doubled and tripled over and over again.

In the spring of 1888 credit tightened and numbers of land speculators had to offer their holdings for sale, to pay off creditors on whose capital they had been operating. Their need to sell forced prices down, and shattered land values which had been artificially inflated by unrealistic speculation. A great “bust” followed the Great Boom. Ten thousand people left town in the first few months after the bubble broke. Houses stood deserted all over town. Public and private improvement works were suspended, making unemployment a pressing problem.”

So if you think at all, that this time is different, you are clearly deluded. The masses fall for it every time: on the way up, they think the prices will keep going up, or they will fall only a little bit and then stabilize and rise again. Finally, at the bottom, they are afraid to buy, fearful of further declines. They fail to use data and history to truly understand the market. I’ve spent enough time explaining asset bubbles, and given resources for exploring this further. It’s all in the archives, so I’m done with this topic. I’m done debating that this bubble will revert to a mean of 7x per capita income or 10-15 x annual rents… that’s a closed chapter. Anyone who thinks it won’t, probably owned tech stocks in 1999 or 2000.

The examples in your post were predictions, and of course they are often wrong. But don’t confuse predictions with economic and business and housing cycles which are repetitive and cyclical and don’t need predicting; they only need to BE UNDERSTOOD. Don’t confuse predicting with understanding market cycles.

nancy-soothsayer, you described perfectly the posts by davelj.

[davelj]

Poway, if I didn’t know any better I would think you just enjoyed constantly being proven wrong in a public forum.

So, since it’s the gist of your criticism, I challenge you to find one single discussion that we’ve had where I didn’t state a clear opinion or conclusion on the issue at hand. One.

As an aid in your sure-to-be-dogged efforts, among the issues we’ve recently addressed include:

Real estate prices: My long-standing prediction has been a 30%-35% decline in the median price from peak to trough here in San Diego. I’ve mentioned this a few times along with a possible time line (which will almost certainly be wrong, but nevertheless…).

Stock prices as an economic indicator: You incorrectly stated (and then argued) they’re a lagging indicator; I pointed out correctly that they’re a leading indicator.

Option ARM mortgage defaults: I suggested that they would be far below 50%; you stated that they would be more than 50%. Moreover, you never did respond to my offer to make a bet on this issue. Thus, how do we really know how YOU feel on this issue? How deliciously ironic given your criticism of me in this thread! File under: “Pot calls kettle black.”

Market efficiency: I stated that I believed in the strong form of market efficiency in the short-term, and the weak-to-semi-strong form over the long-term. You stated that you didn’t believe the stock market was efficient without specifying pesky details regarding degree or time horizon.

WAMU short: I clearly stated that I would not short WAMU because its short-term price movements were basically unknowable to me based on my lack of unique information about the company. I acknowledged that its price could fall at some point in the future but that I wasn’t interested in “taking a swing” – so to speak – at that particular investment because I have more promising opportunities in other areas where I have a competitive advantage.

All that being said, let me come out in favor of NOT ALWAYS having an opinion. Despite the fact that I’ve pointed out in this post areas where I HAVE stated my opinion, having an opinion merely for the sake of having an opinion (something quite popular on this site) is not a particularly admirable trait. In fact, the three most important words that any good investor (and human) learns to utter early in his or her career (life) are: “I don’t know.” The know-it-alls who can’t say “I don’t know and therefore I don’t have an opinion” often end up as President, have ridiculous stock picking shows on CNBC, or run companies like Enron into bankruptcy. And often when you put forth a strong opinion regarding something you don’t really know about you just end up being revealed as a buffoon. As Winston Churchill once observed, “It is better to remain silent and be thought a fool than to open one’s mouth and remove all doubt.”

Because of my profession, however, I do hold opinions regarding a number of the issues on this site, many of which I’ve stated. So, with reference to your particular criticism, indulge me by giving me one issue we (that is, both of us) have discussed in which I did not state a clear opinion or conclusion. One. I encourage you to enlist nancy’s help. Best of luck!

[Nancy_s soothsayer]

davelj–

ok..ok.. you win. You are Warren Buffett, I am not. I have few words, you have tons! You are editor of Wall Street Journal, I am unknown blogger. You Tarzan, me jane. You win. Enough with your obsession with Powayseller. It is getting boring.

[bigtrouble]

davelj

Spot on. Other piggington favs:

“I have no problem affording a $4200/mo mortgage on my six-figure income….” or

“Having timed the market, I sold in 2005 and now have 500k in the bank….” or

“Does buying an Audi instead of a 7-Series make my penis look bigger….”

[powayseller]

davelj, I’m not interested in debating your writing style or assailing your character. I think that often your posts come across as condescending and both-sides-of-the-coin, so the above summary on your positions was helpful. I value your and your contributions to this forum.

[davelj]

Nancy, my obsession is with reaching conclusions through the use of proper facts and logical thought and processes. Sometimes when I see the opposite used to further an opinion, even one I might agree with, I feel the need to point out the factual or logical flaw – it’s a personality flaw of my own. But if it’s all so boring to you then… why… do you keep reading it all? Hmmm…

[bob007]

real estate is not tech stocks. The only way I see a 50% loss in housing prices is a combination of interest rate hikes (hikes would be contain inflation), bad employment situation and actions by foreign countries. It is simply too hard to predict macro-economics. I can see 10% interest rates sometime between now and 2020. I couldn’t tell you when. Real estate is safer than stocks if you do not have any leverage.

[sdduuuude]

Powayseller, your overconfidence is highlighted by this comment:

“… who believes this asset bubble will not revert to its mean is clearly delusional”

While you are arguing about whether or not the bubble will revert to the mean, the real question is “What is the mean?”

Mean of what? What variable will revert to the mean? The growth, the price, the median, a ratio? Not every measurable variable can revert to the mean. And do you take the mean between for the last 100 years? the last 10 years? The 4 years before 2004? the 3 years before 2001?

Will it revert to the mean in a month or in 50 years? Will it revert to the 50 year mean in a year? or the 10 year mean in 50 years?

Here you are certain that your analysis is correct, when it isn’t. And, when you are called on it, you argue the wrong point.

I have had classes where we spent a week or two learning when regression to the mean analysis is just plain useless.

There are many, many ways to use it incorrectly, and you have found one of them.

Yes, the bubble will revert to the mean.
A truly meaningless point.

[sdduuuude]

“But don’t confuse predictions with economic and business and housing cycles which are repetitive and cyclical and don’t need predicting; they only need to BE UNDERSTOOD. Don’t confuse predicting with understanding market cycles.”

This is a truly astounding, naive comment. I’d say it is the oversimplification of the century and the ultimate proof that you really don’t get it. An academic simplification by a non-academic. Amazing.

I’m not even going to critique it. I’m just going to let it sit there, for all to see how easy economic analysis really is in your eyes.

[bgates]

Yes, PS, this was for you.

I think it’s remarkable the way you can call some posters condescending and others delusional in the same thread.

Your point on housing returning to 7.5x median income is a good guess, based I think on Rich’s graph of housing:income ratios over the past 25 years. If someone had chanced on that data in 2002, a cautious reasoned response would have been, “the housing:income ratio is very near the peak of previous cycles. Since prices have a cyclic element, there is a growing risk of housing price decline (relative to income) over the next year.”

I imagine your response had you seen the graph in 2002 would have been to say that housing:income is GUARANTEED to fall 30% from 2002 levels by 2008 because THE DATA shows that’s how long peak-to-trough takes and if you can’t see that you’re DELUSIONAL and living in FEAR.

You didn’t just say prices would drop, you said 30-50% by 2010. That’s pretty specific, and much better than I could do, but I don’t understand the business cycle as well as you.

A year is a long time, though. Could you name the day we’ll reach 30% decline for the county? The month? Maybe you think it would take someone absurdly overconfident to make such a specific prediction, and you’d like to stick to just the year.

[powayseller]

bgates and sduuude, your rebuttals are worthy of another post, and I will put that as one of the first stories to do on my new website.

[Author]

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