December 30, 2011
3 Experts Prognosticate on 2012
By JAMES B. STEWART
Predictions for the economy and markets for 2012 have been bleak, and 2011 was much worse than expected. There may not be much to celebrate this New Year’s Eve.
That may be good news, at least for investors.
The last time things looked this bad — even worse — was three years ago, hard on the heels of the bankruptcy of Lehman Brothers, with global markets plunging and the financial crisis still unfolding. The following year the Standard & Poor’s 500-stock index gained a robust 23.5 percent.
What explains the paradox? Efficient market theorists would say that all the bad news and pessimism about the future are already reflected in stock, bond, real estate and other asset prices. Market prices are in large part predictions, not snapshots of the present. So-called contrarian and value investors, like Warren Buffett, have argued that pessimism is often overweighted in asset prices, which makes widespread gloom a bullish indicator. Mr. Buffett went on one of his largest stock buying sprees this last year, even as the economic news worsened.
These views have been validated by recent research in the field of behavioral economics, which suggests that investors tend to be unduly influenced by recent trends, both good and bad, and project them into the future. Of course, if pessimism over 2012 turns out to be well founded, or if things turn out even worse than expected, then even depressed asset prices will fall further. The trick is to identify conventional wisdom that’s wrong, or at least unduly pessimistic. So I asked three widely followed experts in their respective fields — United States stocks, fixed income and real estate — who have successfully embraced contrarian views (at least most of the time) for their advice for 2012