When Couch Potatoes Go Bad

Paul B. Farrell, a long-time columnist with MarketWatch, seems to have taken leave of his senses.

For years, Farrell has been a staunch defender of index investing, and he has tracked the performance of eight Lazy Portfolios of index funds and ETFs, each created by popular finance authors or prominent investment advisors. (All of them are designed for American investors, but Canadians can easily modify them — my Model Portfolios page contains versions inspired by the FundAdvice Ultimate Buy & Hold and the Yale U Unconventional.)

On July 13, Farrell wrote a column announcing that all of the funds in the Lazy Portfolios finally have a 10-year track record. So for the first time, he was able to review their decade-long performance, and the results were that all of them beat the S&P 500. Granted, the S&P 500 returned –1.59% over those 10 years, which means my chequing account was a better investment, and a large-cap US index is not an appropriate benchmark for a diversified portfolio. But in any case, most of the Lazy Portfolios managed to eke out gains between 2% to 5% during a decade that started and ended with massive crashes, which is a relatively good result.

The problem is that Farrell isn’t following his own advice. While he’s preaching the indexing gospel out of one side of his mouth, he’s also spewing bizarre market predictions: “You’d be a fool not to at least suspect that Wall Street’s miserable past performance will continue in the future decade,” Farrell writes in his July 13 piece. “Yes, you better predict the Wall Street casino will lose another 20% of your money by 2020.”

I need to stress that Farrell isn’t railing against the high fees and poor performance of active fund managers. He’s forecasting a market meltdown — in fact, he’s predicting anarchy. In a recent interview on the Sound Investing podcast, Farrell says, “We are headed into another major disaster… I think that all the signs are there for a collapse of the government, and of Wall Street, somewhere between 2012 and 2016.” He goes on to echo an idea that Barton Biggs advocated in his 2008 book Wealth, War and Wisdom. “You should make sure that you prepare for what is coming, probably very soon. Make sure that you have a home or a farm up in the hills, away from everything, well-stocked with fertilizer, seed, as much food as you can, and rifles and ammunition.” (By the way, according to Bloomberg, Biggs also predicted in mid-2008 that the S&P 500 was about to soar to record levels. Good call on that one.)

Farrell has even set up a website, Wall Street War Zone, that is filled with righteous paranoia about how “Wall Street is engaged in a secret war to manipulate, dominate and control the mind of the investor.” Farrell claims to have successfully called the tech wreck in 2000, as well as the US economic downturn that began in 2007. (In the Sound Investing interview, he also claims to have called the March 2009 recovery.) With that stellar track record, he implies, we should believe his forecast of the coming Armageddon sometime after 2012.

This is truly loony stuff, and it erodes Farrell’s credibility as an investment journalist, especially given that MarketWatch is owned by The Wall Street Journal. A fundamental part of the indexing philosophy is that no one can reliably time the market, predict crashes or forecast the economic future. If Farrell doesn’t believe that, fine. But journalists who advocate a particular investing strategy should eat their own cooking. If he thinks he’s a fortune teller, he should stop writing about index investing, pack it in and move to that farm in the hills. Or he should at least start tracking Crazy Portfolios that are more in line with his outlook. Here’s my contribution, the Run to the Hills Portfolio:

20%  Vanguard Total Baked Beans Fund
20%  Horizons Bull+ Frozen Steaks Fund
20%  Claymore Bottled Water Fund
20%  PowerShares Guns and Ammunition Fund
10%  Rydex Equal Weight Antibiotics Fund
10%  iShares Jantzi Antisocial Index Fund

I’ll report back on this portfolio’s performance in 10 years — that is, if I haven’t run out of ammo.

Congratulations to Alex C., who won the draw for a free copy of The Skeptical Investor. Thanks to everyone who commented on my post about the role of an advisor.