Ben Stein's Financial Gurus are only Human

Some months ago I was a guest on a cable news show; the discussion centered on what were then the early tremors in the stock prices of a number of financial companies. Rumors about the losses in subprime had been floating around, and many major financial firms had been hard hit.

We began by discussing the recent price drop of Merrill Lynch after talk of major problems had been found -- or allegedly found -- on its books. I said I believed that Merrill was a solid firm and that its stock price revealed an unrealistically pessimistic view of the firm's future. At the day's price, I said, Merrill was a major bargain.

Another guest on that show was financial figure, stock picker, and prognosticator Peter Schiff. He strongly disagreed, saying the financials were in terrible trouble.

Yes, I Was Wrong

Now, it is an understatement to say that Mr. Schiff was right and I was wrong in this case. I had foolishly believed Merrill's protestations of its soundness. Moreover, I had mistakenly believed that the federal government would never allow the financial sector to reach the edge of collapse without supervision and rescue across the board. Again, I was wrong and Peter Schiff was right -- in a very big way.

Since that time, I have received a huge amount of email from Mr. Schiff's fans, telling me what a loser I am and how hopeless a dunce I am. I am not quite sure why that is. I often disagree with others on TV and have never gotten the volume of hate mail I have received from Mr. Schiff's followers.

Since I have repeatedly acknowledged my mistakes, I just delete the email and go on with my day. But in the past few days, an article appeared in 'The Wall Street Journal' that was quite telling about what frail vessels we humans are when it comes to money.

'The Wall Street Journal' Weighs in on Peter Schiff

In this article there was an analysis of how Mr. Schiff's investors at his Euro-Pacific entity have done. To put it mildly, the word is bad. While full results were not made available, the article stated that the Euro-Pacific investors' portfolios were often down 50 percent or more in 2008. This was in part because of misplaced bets on commodities and stocks of developing nations, and large wagers against the dollar.

As we now know, stocks of less-developed countries have been seriously demolished in the correction, far more so than the major U.S. indexes. Commodities, especially energy commodities, have fallen sharply. And the dollar has rallied amazingly against almost all currencies as investors seek shelter in what is generally held to be the safest country with the safest currency.

So Peter Schiff was right about financials -- but he was wrong about many other elements of the investment picture.

Comparing Portfolios

Your humble servant, Ben Stein, and his writing partner, financial guru Phil DeMuth, have on many occasions published our model portfolio. It is not at all complex. It is just half Vanguard Total U.S. Bond Index and half Vanguard Total Stock Market Index. It is not sexy -- although we have offered ways to spice it up a little.

Thanks to the strength of bonds and the relative strength of the U.S. stock market compared with overseas markets, our model portfolio was down roughly 20 percent in 2008. This is obviously not great compared with an up result. But it is pretty good compared with the results that Mr. Schiff apparently posted.

I do not mention this to brag. I have some investments outside the model portfolio that have done extremely poorly since the correction began, and I make mistakes constantly. My point is something else.

Gurus Aren't Miracle Makers

Do not look to gurus to accomplish miracles. Sure, they can on occasion. But the markets are so unpredictable and complex that the future is simply unknowable in any short period.

Warren Buffett is by far the smartest man in finance I have ever met. Yet even Mr. Buffett has made extremely serious errors by investing heavily in bank stocks. He even made a disastrously wrong bet (so far, I think it will turn out fine in the end) by selling an immense put on the stock market, wagering it will revert to its 2007 highs within seven years. (Marked to market, this is a nightmare, but if Buffett thinks it will turn out OK, who am I to say it won't?)

I assume that Peter Schiff is a fine and capable man. But he is not Superman. He is a man. No more. Recently I heard him make a prediction on a California radio station of simultaneous ruinous inflation and a complete collapse of the economy. At least this is what I understood him to be saying.

This scenario has no precedent in history that I am aware of. Maybe we have skipped the rails of history, but a huge increase in demand -- fueling inflation -- coincident with a huge drop in economic activity (which is what I understand Mr. Schiff to be predicting -- maybe I am wrong) would make no arithmetic sense. Maybe it will happen anyhow. But it is very far removed from typical cause and effect.

Again, I emphasize that I am extremely fallible, too. We all are.

So far, bonds as recommended by Phil DeMuth have been wonderful. And cash, highly recommended by investment advisor Ray Lucia, has also been excellent. A huge slice of liquidity, plus immense diversification -- nothing exotic -- still looks good, even in these dicey times.

I admire Mr. Schiff for getting the financials picture so right. Maybe he will get other things right in future years. But as the proverb says, "Put not your trust in princes."