When the Experts Are Mistaken

Understanding the financial marketplace is a critical part of a portfolio manager’s job, and listening to experts is one of the ways we gain important insight into what is going on. Of course, we at BWFA take any comment from any supposed expert with a grain of salt. But we still are constantly amazed at how confusing, erroneous, contradictory, or misleading experts can be.

For your amusement, here are a few quotes to put into perspective what we have heard, and what we must filter through to make recommendations on your behalf. Please keep in mind that we do not mean to belittle these people of significant accomplishment. We know firsthand that it takes courage and knowledge to make difficult predictions. We also know that all of us need some humility to keep us in check, so here we are providing a dose of humility and humor:

Alan Greenspan, former Chairman of The Federal Reserve, helping Congress understand his view on our economy: “I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.”

Henry Paulson, former Secretary of the Treasury, giving his assessment of how the mortgage crisis would affect the rest of the economy: “Damage to the American economy from the housing market downturn and subprime mortgage foreclosures appears to be contained…”

Timothy Geithner, current Secretary of the Treasury, commenting on the stability of The U.S. financial market on May 16, 2006: “In the financial system we have today, with less risk concentrated in banks, the probability of systemic financial crises may be lower than in traditional bank-centered financial systems.”

John Thain, former CEO of Merrill Lynch, several months before Fed Chairman Ben Bernanke forced his company into a merger with Bank of America: “These transactions make certain that Merrill is well-capitalized.”

The IRS trying to explain the the intention of Congress on Form 8583: “Passive activity income does not include the following: Income for an activity that is not a passive activity.”(Explanations like this keep Bob Cassel employed.)

Suzie Orman, financial planning guru: “Owning a home is a keystone of wealth… both financial affluence and emotional security.”

Robert Citron, former Treasurer for Orange County, California, for more than 20 years, who pushed his county into bankruptcy by investing in risky investments because he wanted a higher rate of return: “I was an inexperienced investor.”

Sidney Homer, Salomon Brothers analyst: “One thousand dollars, left to earn 8 percent a year, will grow to $43 quadrillion in 400 years, but the first 100 years is the hardest.”

A Yale University professor explained his low grade to a student who proposed a business of reliable delivery services: “The concept is interesting and well-formed, but in order to earn better than a ‘C,’ the idea must be feasible.” (The student went on to found Federal Express Corp.)

Rick Santelli, CNBC commentator, September 2, 2008. “I think the economy is healthy.”

Thomas J. Watson, founder of IBM, famously made this comment at the dawn of the commercialization of computers: “I think there is a world market for maybe five computers.”While this is one of the all-time great mistaken predictions by a smart businessman, we should give Watson his due. He also had this observation about making mistakes: “Recently, I was asked if I was going to fire an employee who made a mistake that cost the company $600,000. No, I replied, I just spent $600,000 training him. Why would I want somebody to hire his experience?”