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The Great Depression Ahead? Don't Be So Sure

Harry S. Dent has made quite a name for himself. The longtime investor is the author of the current bestseller The Great Depression Ahead, which predicts -- guess what? -- a new Great Depression right around the corner. Earlier this year, I had the opportunity to interview Dent and to attend one of his February presentations, which was sponsored by a local financial planner.

Dent is clearly a brilliant man, and he makes some very compelling arguments based on the demographics of aging baby boomers, like me. But he also illustrates an important point: Before you rely on the advice of any popular market forecaster, check up on their track record.

Dents in Dent's forecasts
In the book, Dent initially predicts the Dow will have a bounce up to somewhere between 12,000 and 13,200. This will occur between April and September of this year before the next great depression takes hold and the Dow falls to 3,800. In his presentation just a couple of weeks after our interview, Dent seemed to back off those numbers and recommended that the audience get out of stocks no later than July or August at the latest.

Now Dent is a great presenter, but my attention was often diverted to the 700 or so guests in the room. Their heads were nodding yes nearly the whole time, which seemed fascinating and a tad disturbing. I felt like I had stumbled into a religious revival rather than a financial seminar. My hunch is that the financial planner who sponsored Dent signed up new clients in droves.

It wasn't so much what Dent said that I disagreed with. It was more what he didn't say that I found fascinating:

  • During the up markets between 2004 and 2006, Dent said the Dow would rise as high as 40,000 by this year.
  • Later, he lowered that forecast and suggested the Dow would trade between 15,500 and 16,000 in 2008. It actually closed at 8,776.
  • A mutual fund known as the AIM Dent Demographic Trends Fund once had $2 billion in assets and then was merged into another now extinct mutual fund after 80 percent of the assets were gone. Dent told me that the poor performance was due to the fund not taking all of his advice.
Call me picky, but I'm thinking that being wrong to this degree and costing investors hundreds of millions, if not billions, of dollars is a relevant disclosure. (Late last year, the folks at MaxFunds handed Dent a "Mutual Fund Turkey" award for his wild predictions.)

Why is Dent so successful?
Dent is smart, charismatic, and driven. While those are ingredients for success, the secret for his success lies in the heart of the investor. People hate uncertainty and want to believe that they are in control. Harry Dent delivers exactly what people want -- something to satisfy our emotions. In good times, he predicts more good times. In bad times, he predicts it will only get worse and tells us what to do.

The desire to be in control blinds investors. So much so that most won't even do a basic Google search to see what kind of track record their flavor-of-the-month market guru actually has. Instead, investors rush in to take his advice, in that predictably irrational way.

My advice
Rational investing is simple but not so easy. Investors must first accept that they don't actually know that much about the future. Investing as if you know the Dow is going to go to 40,000 or 3,800 is one good way to assure your nest egg will never grow by much. When it comes to investing, it's what you know you don't know that counts.

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