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Farr: Experts Opine - What Do Experts Know?

Monday, 16 Mar 2009 | 9:43 AM ET

In Sunday’s Washington Post, Tomoeh Murakami Tse wrote an article titled "Three Wise Men Offer Three Takes On Markets."It offered current opinions on investing from three great experts: Bill Gross, Burton Malkiel, and Peter Lynch. It’s a good article and I recommend it to you. The advice is fascinating. Gross, the famous bond manager, says he sold all of his stocks. Princeton professor and author of "A Random Walk Down Wall Street," Burton Malkiel, advocates being invested in a total stock index fund, a total bond index fund, and a money market fund. Peter Lynch, famed manager of Fidelity’s Magellan Fund says, "Bargains are all over the place. I feel like a mosquito in a nudist colony."

Each speaks with decades of expertise and experience. So who’s right? They all can’t be right. I agree with Malkiel and Lynch, but I’m not very sure about timing. It is easy to argue how markets could resume their decline, but valuations are attactive and the Dow Jones bell-weather is down 50% in the past 14 months. Experts offer historical context and articulate proven disciplines to septuagenarian widows who are scared and suffering significant erosion to their net worth. Consequences to professional advice are as severe as anytime since the 1930s.

What Do They Know?

I’m reminded of 1997 when Alan Greenspan famously suggested irrational exuberance and Warren Buffet said that the premium for a share of Berkshire Hathaway was excessive. It was November 1996, and the Dow was at 6000 and Berksire Hathaway was at $33,000. Eight months later, the Dow rose to 8,000 and Berkshire was $46,000. And two of the greatest experts of our day were absolutely right about underlying valuations and dead-wrong about the markets.

What I Know

I know that the short-term is anyone’s guess. It is equally possible that the markets will be 20% higher or lower in the next six or twelve months. I know that careful and dogged pursuit of a conservative investment discipline is the best course to protect and pursue client interests. If you have a clear, well-founded investment strategy and sufficient time to endure a full market cycle, you will persevere. The market bottom, like its 2007 top, will only be recognized in retrospect. I especially know that investment decisions, to buy or to sell, that are satisfying and comfortable are typically precisely wrong.

Right now, selling feels good. Being invested in cash or short term bonds or CDs feels really good. Ask yourself: is the market price high or low? Should I sell low?

My best GUESS is that we are forming the second down leg of a bear market that will ultimately consist of three separate down legs. The W-shaped bottom was the pattern followed in the 73-74 and 02-03 bear markets. The economy will continue to contract as long as housing prices continue to fall. Unemployment continues to rise. Unemployment is a lagging indicator and will increase for a time after the economy has bottomed. The stock market is a leading indicator and will turn higher in advance of the market bottom. The old saying reminds investors that there isn’t a bell at the market top or bottom.

So, we stick to our discipline, research our holdings doggedly, and have faith that that the US economy will prove as resilient as ever. As tempting as it may be to persuade yourself that you know what lies ahead for the markets or oil or gold, we assure you that neither you nor anyone has more than a guess. Therefore, invest based on the facts and data you have. Peter Lynch points out that we’ve had 11 recessions since World War II and 11 recoveries: a perfect record!

Read what other CNBC Contributors are saying....

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Michael K. Farr is President and majority owner of investment management firm Farr, Miller & Washington, LLC in Washington, D.C. Mr. Farr is a Contributor for CNBC television, and he is quoted regularly in the Wall Street Journal, Businessweek, USA Today, and many other publications. He has been in the investment business for over twenty years.

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