The Worst Investment Calls of 2011: Part II

Last time I discussed two of the worst investment predictions of 2011 — that stocks would crash if the U.S. credit rating was downgraded and that the U.S. bond “bubble” would burst (Part I).

Let’s look at a few more wrong investment predictions in 2011:

3. Financial stocks are undervalued and will rebound nicely

Many mutual fund managers want you to believe they can make a quick buck in so called “undervalued” stocks. Consider two of the top mutual fund managers in the past decade: Bill Miller of Legg Mason Value Fund and Bruce Berkowitz of Fairholme Fund.

Miller’s claim to fame is that he’s the only mutual fund manager to beat the S&P 500 Index 15 years in a row from 1991 to 2005. Since then it’s a different story as his fund has vastly underperformed U.S. stocks. He made big bets on financial institutions in 2008 and again in 2011 — wrong bets that cost shareholders in the fund big time.

Despite his current woes, his long-term record looks impressive on the surface. Consider that since he's been running the fund since 1990, he's up about 500%. There's just one problem: the S&P 500 index is up over 540%. So despite his 15 years of outperformance, you actually would have been better off simply owning the index than sticking with this so called genius stock picker.

Or consider Berkowitz — named a “Mutual Fund Manager of the Decade” — who loaded up on Bank of America and Citigroup in 2011. Those stocks lost 58% and 44%, respectively, in 2011, making the fund lose -32% overall in 2011.

The performance of these guys was so bad that they competed for last place among all U.S. mutual funds in 2011. Don’t worry though. Miller will be OK. After all he’s already bought his multimillion dollar yacht — Utopia. Problem is, it’s not utopia for you if you owned these funds.

4. Picking individual stocks from these experts will beat the market

Every time there’s market volatility, the investment astrologers come out. 2011 was no exception. Barclays Capital, considered one of the top stock research firms in the world, published its “Global Top Picks for 2011” from their analysts. A giant institution like this, with its research prowess, could surely offer insight about 2011, right? Barclays even predicted the potential gain you would see for each of stock pick.

Here were Barclays’ 10 best ideas for 2011, their predicted return and what actually happened:

A monkey throwing darts at the newspaper could have gotten better results than this. Barclays’ single top pick

AMR Corp, which is the parent company of American Airlines

went bankrupt while Barclays stated the company offers the “best cash flow and incremental earnings potential.”

— —

Oops.

5. Interest rates will go up and so will inflation

The late George Bernard Shaw, a playwright and founder of the London School of Economics, once said, “If all the economists were laid end to end, they'd never reach a conclusion.” That’s how hard it is to predict economic trends.

Economists predicted interest rates would rise in 2011. Instead they fell to historic lows. U.S. bond interest rates fell from around 3.4% to around 2% by year end. The Mortgage Bankers Association also forecast that 30-year mortgage rates would rise to over 5% by the end of 2011. In fact they fell to record lows near 3.2%, providing a fantastic opportunity for you to refinance your mortgage.

It was the same thing with inflation. For years we’ve been hearing rumors that high government spending would cause high inflation, which is the rise in the price of goods and services. But from November 2010 to November 2011 inflation was approximately 3.4%, which is not too much higher than the average annual rate over the past 80-plus years.

So if you shifted your investment portfolio last year based on predictions of the U.S. collapsing, the bond bubble bursting, interest rates rising or institutional research, you probably lost.

Better luck next time.

Read more:

How to Make a Puny From a Muni

A Sense of HopelessnessHow to Navigate Market Volatility