Traders celebrate on the main trading floor of the New York Stock Exchange as the Dow Jones Industrial Average passes the 20,000 mark shortly after the opening of the trading session in New York, on Jan. 25, 2017. Economist Terry Burnham predicted that the Dow Jones Industrial Average would hit 5,000 before it hit 20,000. With the Dow hitting 20,000 today, Burnham discusses how he got it so wrong. Photo by Brendan McDermid/Reuters

Column: How Chicken Little got Dow 20,000 so terribly wrong

Economy

Traders celebrate on the main trading floor of the New York Stock Exchange as the Dow Jones Industrial Average passes the 20,000 mark shortly after the opening of the trading session in New York, on Jan. 25, 2017. Economist Terry Burnham predicted that the Dow Jones Industrial Average would hit 5,000 before it hit 20,000. With the Dow hitting 20,000 today, Burnham discusses how he got it so wrong. Photo by Brendan McDermid/Reuters

In July 2013, I wrote, "We will see Dow 5,000 before we see Dow 20,000."

Today, the Dow hit 20,000. I was wrong, I am an idiot.

You can stop reading here if you like. If you want to read more, I will discuss my excuses, the impact of my prediction, my one regret and my current state of mind.

The Dog ate my Dow 36,000 prediction and someone substituted Dow 5,000

I hate excuses. I picked Dow 5,000 before Dow 20,000, because it is objective and observable. Let me restate my lack of excuses.

  • The dog did not eat my homework — I didn't do my homework.
  • The sun was not in my eyes — we played the game at night.
  • We didn't lose the game because the referee made a bad spot on fourth down for the other team — we had three turnovers and we deserved to lose.
  • I wasn't late because traffic was unexpectedly bad — I was late because I left home too late.
  • I didn't quit to spend more time with my family — I was fired.

I am an idiot. I was wrong. My attempt at a pithy summary:

With fancy pedigree and all your fame
You're just a monkey tossing darts — for shame!

The psychological and financial impact of being wrong

Not only was I wrong, the stock market rally has been relentless. I probably wasted a year of my life watching prices and feeling terrible. When the Dow was at 18,000, a couple years ago, I described the psychological impact as follows:

In the spirit of the late Rodney Dangerfield, how bad do I feel? So bad that I have trouble sleeping. So bad that my family relationships are strained. So bad that my physical health has been impaired. Perhaps most annoyingly, so bad that I have a sore on my right arm that will not heal. I am not a doctor, but I am confident that my sore would have healed if I had not made my Dow 5,000 prediction. I feel a deep malaise, causing (in my mind at least), a low grade cough, sallow complexion, irritability and an impaired immune system.

While I have been skewered emotionally for years, the financial impact of being wrong has been almost zero. Obviously, I could have made a ton of money buying stocks since my prediction. I suffered opportunity costs, and they are real.

However, I did buy an expensive home and lot of Treasury bonds. Those investments have done well. More importantly, all of us would prefer to live in world with a strong stock market and economy. Thus, almost everyone benefits from a rising stock market, and I have created a list of 15 ways my family has made money from the stock market, which I repeat here:

Direct financial impact
1. Increased pay this year
2. Increased chance of keeping my job
3. Increased chance of getting the next job
4. Increased chance of my wife's startup company raising money
5. Increased chance of my wife getting a different job

Indirect financial impact
6. Lower future federal taxes
7. Lower future state taxes
8. Lower future medical expenses
9. Increased future Social Security payments
10. Decreased future costs of supporting my children

Non-financial impact
11. Higher career prospects for my children
12. Decreased chance of being a victim of crime
13. Decreased chance of decline in social order
14. Decreased chance of war
15. Decreased chance of disease

A regret

I began disclosing my actual investment decisions in 2015 in "Where does Chicken Little invest." My regret is that I didn't start my disclosure at the same time as my "Dow 5000" article back in July of 2013 — for two years I was shunning stocks and buying bonds, but these investments of mine were not public.

In that 2015 article, I wrote, "My macroeconomic views predict falling U.S. stock prices and rising U.S. Treasury bond prices. I choose to make my one risky investment in the U.S. Treasury market because that investment is consistent with momentum." As noted, Treasury bonds have done fine (even including the recent plunge — at least so far). But people who took my Dow 5,000 advice without knowing that I strongly favored Treasury bonds would have lost money. I am sorry if that applies to you.

My next prediction

In my 2005 book, "Mean Markets and Lizard Brains," I predicted bad times and those bad times did come in the years 2007 to 2009. My prediction track record is 50-50, just like flipping a coin. Fans of the efficient markets hypothesis, which states that it's impossible to beat the market on average, would not be surprised by a 50 percent hit rate.

I believe that markets are (almost) impossible to predict. Thus, I expect market predictions to have about a 50 percent chance of being correct. Sadly, my knowledge of the difficulty in predicting market moves does not seem to prevent my lizard brain from thinking otherwise.

Finally, I wish I could now be optimistic. From 1982 to 1999, I was optimistic and 100 percent invested in the stock market. I recall vividly laughing off pessimistic views in 1996, thinking the speaker was a worrywart or, worse yet, a Chicken Little. I wish I could be young, optimistic and fully invested in the stock market.

Is everything going to be okay? I don't know. I do know that being both wrong and scared is not a happy place.

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