Forecasting Giants of the Past

In 1981 a fellow named Joseph Granville had become so influential a stock market forecaster that in January of that year one of his "sell signals" sent the Dow Industrials downs almost 3% in a single day. Granville himself announced soon after that he never would make another forecasting mistake and put a claim in for the nobel prize in economics. Sad to say, Granville remained bearish through the explosive start of the great bull market which began in 1982 and this destroyed his reputation as a market guru.

At the height of the Granville phenomenon a market analyst named James Alphier published a report in which he summarized Granville's record. He then compared it to the records of the few market gurus who were truly forecasting "giants" because of their long records of successful predictions. Alphier concluded that many aspiring gurus were "hot" (i.e. accurate) for three to five years, but that most of them soon lost their touch. Only a few managed to sustain records of tremendous accuracy for a period of 10 years or more.

Sadly, Alphier passed away prematurely in 1990 at the peak of his own career. But I think his essay on this subject is so insightful and interesting in its historical observations that I want to reproduce it below

Here is Alphier's 1981 report entitled "Granville in Perpective".

GRANVILLE IN PERSPECTIVE (copyright 1981 by James Alphier)

As anyone who follows the stock market knows, considerable interest and controversy surrounds the analytical activities of Joseph Granville. While a great deal could be written on the subject, there are questions we do think useful for investors to answer:

- How has his accuracy compared to other stock market prognosticators in the past?
- Based upon past experience with other forecasters, what probability does he have of continuing his record?

There is a great deal more that could be written, in terms of comparing methodologies and other topics, but we think the answers to these two questions will be sufficient to gain a perspective.

THE GRANVILLE RECORD

Anyone who views a chart of [the Dow] [from] 1977 to the present [1981] will see several pronounced, large price swings. The indisputable fact and the sole claim to unusual forecasting ability which Granville possesses is that he has simply indicated the termination of every one of them very close to the extreme reversal point.

Because Granville was bullish the entire period from 1972 to the beginning of 1977, we are not including his correct bullishness during 1975-1976 in his record. We are counting from reversal of opinion to reversal of opinion. We believe this is the only fair way to go about it. Prior to 1975 by his own statements Granville was nothing but a mediocre market analyst, with some correct forecasts and some incorrect forecasts. He was rightly bullish during the latter half of 1970. As noted, he stayed bullish throughout the historic 1973-74 bear market. In 1966 he missed both the top and the bottom of that short-lived, but painful, bear market.

Granville makes no particular claims about a consistent ability to select individual stocks. Such a record of all recommended issues or groups is not available except to a person who goes back through years of his market letters themselves. One recent private study of his stock selection acumen is cited in BARRON'S, January 12, 1981, page 38. This study claims poor net results.

Whatever claims may be made as to continued future accuracy, the bald fact is that he has established his reputation completely on his skill in forecasting significant swings in the Dow Jones Industrial average over the past four years.

The first question that may be asked is, "How often has an analyst, whose research is publicly available, been able to do something like this in the past?" The answer is, that for periods of as little as four years, there have been many analysts who have been able to (1) forecast the major market averages, (2) nearly coincide with the extreme high or low, and (3) do this on the significant swings. We could not, in fact, list all the them because there are doubtless several of whom we are unaware. Here is a random sampling of analysts who made truly exceptional forecasts meeting the criteria listed above for particular periods: Karl Kaiser (1957-1961), John Denninger (1965-1968), Burns and Kirkpatrick (1972-1975). This is very far from being an exhaustive list.

In these, and most other cases we could cite, there is a tendency after three to five years of near perfect forecasting for the analyist to make one or more major errors. We will not recount the many painful examples of this in our files. There have been some, however, who have been able to sustain tremendous accuracy over much longer periods.

FORECASTING GIANTS OF THE PAST

Major L. L. B. Angas began forecasting the New York and London stock markets after World War I. He was substantially correct in forecasting the booming markets of the 1920's, the 1929 top, the 1932 low, and other major swings in the stock market during the period ending just before World War II. He also made a series of correct economic forecasts as well during this period of time. After almost three decades of unusual foresight, his analysis became much less accurate.

Hamilton Bolton started the "Bank Credit Analyst" in 1949, in part using ideas which had been developed by a now-obscure analyst named Harding. In the early 1930's Harding developed a theory of tracking the flow of money and credit in the banking system. Between 1949 and Bolton's death in 1966, his service correctly predicted all of the major bull and bear swings experienced by the stock market with but two exceptions: being bearish in 1951-52 during a basically flat, trading range market, and missing the 1962 collapse. The latter, Bolton correctly maintained, was purely psychological and would be more than completely retraced. In addition, Bolton established beyond question that money and credit flows as measured by statistics provided by the banking system itself had an important effect on the general level of stock prices. Many of his ideas are now widely accepted by stock market analysts and economists. Since 1967, the basic theory has continued to "work" non-randomly, but not nearly with the precision it had before.

George Lindsay started in the early 1950's with an advisory letter, and began issuing detailed annual stock market forecasts in 1958. These were based on his unique theory of "repeating time intervals" which still stands at right angles to all other forms of analysis. These forecasts actually indicated probable dates of significant highs and lows in advance and their likely amplitude! During this time, any person who dared follow these forecasts would not have been caught substantially unaware by any worthwhile market swing. The year 1970 ended a long success streak when the dramatic March-May collapse was very much understated and given less than high probability of occurring. Mr. Lindsay is still practicing and while having made some errors has continued to compile a highly non-random record considering the type of forecasting he does.

Edson Gould began writing a market letter more than three decades ago. Up until 1976, he had correctly called all major bull and bear markets, often just a few days from their exact termination. He had no misses during this time period. Since 1976 his constant bullishness has, in fact, been borne out in the broad, unweighted price indices, but not in the Dow Industrials. Nor did he correctly anticipate the steep drops of October 1978, October 1979 or February-March 1980.

In our opinion, the ultimate crown for sustained accuracy and forecasting acumen must be bestowed upon the late Paul Dysart. Between 1945 and 1967, with only three minor exceptions, Dysart called all major bull and bear markets very close to their extremes. His average error in both points and time was very close to zero. In 1958, 1963 and 1964 Dysart recorded "false" sell signals which he quickly realized were incorrect and took them back. Unlike every other analyst we have labeled as a "forecasting giant", Dysart also had an ability to select issues for long-term investment. His compact list of recommended stocks over this twenty-two year span had a grossly disproportionate number of exchange-traded issues which racked up multi-hundred percent gains and which genuinely enriched a small but loyal band of subscribers.

INVENTORS OF METHODS

Insofar as we know now, Angas, Lindsay, Gould and Dysart developed their unique forecasting methods "on their own". Their track records are monuments to original research. It is clear, of course, that they were influenced by other researchers, but their work was largely their own.

Most of the original core of Bolton's concepts , as noted, came from Harding, although we are not aware of Bolton's acknowledging this fact. However, he certainly did considerable research on his own, and greatly expanded the original body of ideas.

One particular methodology (which has several derived indicators) and is - according to Granville - vitally important to his forecasting is On-Balance-Volume or OBV. There is no reason whatever to doubt Granville's claims of having invented it in the summer of 1961 but it should be recognized that very similar work on volume had been independently performed at least as early as 1955.

THE BOTTOM LINE

At this point in time (February 1981) Granville is pushing against the normal, three-to-five year limit which has seen the great majority of near-perfect forecasters of the past make an important error. He has considerable company among the legions of market analysts, past and present.

The main difference is that Granville has been promoted to an extent previously unheard of for a market letter writer- although even here some Wall Street figures prior to World War I who were proportionately as famous.

The shortest near-perfect record among those we have dubbed "forecasting giants" was twelve years, and the longest was over thirty. All things being equal, the ability of Granville to join the giants will depend upon his being able to continue doing as he has for another decade. This in turn will not only depend upon the efficacy and durability of his analytical methods, but surely upon many other factors as well.

POSTSCRIPT (added by Carl Futia on April 23, 2005).

Granville's hot streak ended in August 1982 when he missed the start of an enormous bull market and then stayed bearish for many of the subsequent years. His collapse as a forecaster was as spectacular as his rise. Note that his "moment in the sun" lasted just a few months longer than the three-five year period predicted by Alphier (who clearly did not rank Granville among the giants).

The next famous guru to come along was Bob Prechter of the Elliott Wave Theorist. Prechter was spectacularly successful during the 1982-87 bull market period in the Dow. But then from 1987 onward he consistently predicted an imminent crash and depression, so I think it fair to say that his "hot streak" lasted five years too.

I know of no "market timing" gurus who emerged during the 1990's and this is probably due to the fact that the stock market marched steadily upward during that period with scarcely any observable pauses. My guess is that the year 2000 marked the start of a more normal environment with many up and down swings. For this reason I expect to see more gurus attract public attention during the coming years.