The Global Financial Crisis in 2008 was a disaster for many investors, but at least two managers can actually claim they predicted the crash.  Both Robert Rodriguez, renowned manager of the FPA Capital fund, and Peter Schiff of Euro Pacific Capital accurately predicted the decline from October 2007 through February 2009.  Did their prescient forecasts pay off for investors?

As far back as 2005, Robert Rodriguez bemoaned the “investment foolishness” in the market, noted the “financial strains” at Fannie Mae, Freddie Mac and identified problems in the real estate market.[1] In June of 2007, Rodriguez delivered a speech to a group of financial analysts in which he outlined how the stock, bond, private-equity and hedge-fund markets were all caught up in “a speculative bubble”.  In December 2007, Rodriguez was so worried the credit crunch would cause a severe recession, he temporarily halted all stock purchases in his fund.  By March 2008, cash had swelled to more than 40% of the stock fund’s total assets.[2]

For these spot-on predictions, Money Magazine declared Rodriguez to be “the best fund manager of our time.”[3] How were FPA Capital Fund shareholders rewarded for Rodriquez’ prophetic calls?  Unfortunately, not so well.  The fund lost 35% in 2008.  Perhaps not the result investors had hoped for from someone who predicted the future.

The financial media’s praise of Rodriguez may take second fiddle, however, to the buzz surrounding Peter Schiff, president of brokerage firm Euro Pacific Capital.  He gained attention on major television networks in 2006 and 2007 with his bold forecast of over-leveraged American consumers leading the U.S. economy into recession.

In 2007 Schiff authored a book, Crash Proof:  How to Profit from the Coming Economic Collapse, in which he recommended investors pile into gold, commodities and high-dividend paying foreign stocks.  As conditions in the U.S. economy and the markets deteriorated, his predictions brought him fame as an economic guru who could help shelter investors from the storm. Nervous investors poured money into accounts with Schiff’s firm.

Sadly, for investors hoping to profit from Schiff’s advice, 2008 made mincemeat of their portfolios.[4] Many Euro Pacific customers attested to losing 50% or more, much worse than the 37% drop in the U.S. market.  This was due, in part, to Schiff’s expectation that the weakening U.S. economy would cause the U.S. dollar to depreciate rapidly, providing an extra boost to shares of international investments.  Instead, the dollar advanced, magnifying the already steep losses in the international markets into which Schiff so aggressively steered his clients.

These examples highlight the difficulty of a market-timing strategy even for the smartest (or luckiest) of investors and provide a lesson for the rest of us:  When it comes to trying to beat the market, even correctly predicting the future may not be enough.

1 Gullapalli, Diya.  “Manager Foresaw Crisis—but Didn’t Avoid Big Losses.”  Wall Street Journal, January 5, 2009.
2 Annual Report, March 31, 2008.  FPA Capital Fund, Inc.
3 Zweig, Jason.  “The best fund manager of our time.”  Money, April 8, 2008.
4 Patterson, Scott, Joanna Slater and Craig Karmin.  “Right Forecast by Schiff, Wrong Plan?”  The Wall Street Journal, January 30, 2009.