Gary Schilling's 2009 Predictions - What Went Wrong?

Gary Schilling, president of A Gary Schilling & Company, was one of the few economists who went against the herd at the end of 2007, by predicting the collapse of the real estate bubble, and recommending against owning stocks. Those that listened to him in 2008 were rewarded. In the beginning of 2009, Schilling predicted more of the same, as this article notes, "we're still screwed." Among his 13 gloomy predictions was that the S&P 500 would end 2009 between 500 and 600. It actually closed at twice this amount at 1,115.

The Money Show
I happen to be a fan of The Money Show. In my view, it's the world's largest behavioral finance lab where thousands of investors can be observed chasing what has been hot in the previous years. I get many of my Irrational Investor column ideas from presentations and discussions at this show on how to lose your shirt on trendy investment ideas. But I was thrilled to hear Gary Schilling speak last May at the Las Vegas Money Show.

Gary wasn't giving the "how to get rich" presentations of many others selling their goods at the show. Getting rich wasn't even on the table in his presentation, and I came away more than a bit depressed with what he had to say, as the market had started it's rebound two months earlier. His logic on why the rally would end in another collapse was impeccable. So impeccable that Schilling made me doubt all of the additional equities I had bought as part of a rebalancing strategy during the market collapse. He was far more convincing to me than Harry Dent's logic on why one should get out of the market by the summer.

Schilling went over the twelve predictions for 2009 noted by Henry Blodget, CEO and editor of The Business Insider.

1. Sell homebuilder stocks and bonds.

2. If you plan to sell your house, second home, or investment houses anytime soon, do so yesterday.

3. Sell some housing-related stocks.

4. Sell some consumer discretionary spending companies.

5. Sell most commercial real estate.

6. Sell some commodities.

7. Sell emerging market equities.

8. Sell emerging market debt.

9. Buy the dollar.

10. Sell stocks in general. (S&P 500 to 600)

11. Sell consumer lenders' equities.

12. Buy, carefully, high-grade bonds.

What went wrong?
As it turned out, 2009 ended with stocks at twice his forecasted level, with emerging market equities going on a tear, and with the dollar continuing to get pounded overall for the year. Other predictions were wrong as well, such as the high grade bonds he recommended far underperforming junk.

Schilling is mostly standing behind his forecasts going into 2010, and recently warned of more hard times ahead. He's no longer predicting a stock market collapse, instead saying the market will "tread water" in 2010.

Lessons Learned
As I mentioned in my column on the predictions of Harry Dent, the point isn't to pick on Gary Schilling. In fact, I happen to be a fan of his. The actual point is to shine a spotlight on the folly of either making predictions or listening to them. Predicting the future is, and I'll attempt to say this without sounding close minded, pretty close to impossible.

Schilling's incredible accuracy in 2008 was nearly matched by his incredible inaccuracy the following year. Thus those that became aware of Mr. Schilling at the end of 2008, and followed his advice for 2009, experienced the full pain of the 2008 collapse without getting any of the rebound.

My advice is to know we don't know what the stock market is going to do in any given year. We also don't know the next hot company, or sector, or even what the dollar will do.

I applaud Schilling for his great work, but urge investors to think long-term and avoid going in and out of investments based on what any individual predicts, or consensus opinion states. Even contrarians are often wrong.

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