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(MATTHEW STAVER)
(MATTHEW STAVER)

Strategies

Even gurus make gaffes Add to ...

It hasn't been a good time to be a market hotshot lately.

Amid volatile and unpredictable financial markets, some of the most prominent names on Wall Street have been stumbling badly, and very publicly, with their investment calls.

The growing list of big-name pratfalls includes:

Bill Miller - The chairman and chief investment officer of Legg Mason Capital Management ditched his position in Eastman Kodak Co. , after seeing his sizable holdings lose 90 per cent of their value since he bought into it 10 years ago. His flagship Legg Mason Value Trust mutual fund had underperformed 94 per cent of its rivals in the past year.

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John Paulson - The famed hedge-fund manager at the helm of Paulson & Co. lost something north of $100-million on the firm's major investment in troubled Sino-Forest Corp. , adding to the fund's headaches with its struggling positions in Citigroup Inc., Bank of America Corp. and gold.

Bill Gross - The founder and co-chief investment officer of Pacific Investment Management Co. LLC (Pimco) has been shorting U.S. government bonds for months, betting that the bubble in Treasury paper was bound to burst. Instead, the U.S. bonds have continued to rally, as investors have increasingly turned to them as a safe haven.

Hank Greenberg - The former head of American International Group Inc. was pushed off that ship before it sank, but his investment firm Starr International Co. went down with the ship at China MediaExpress Holdings Inc., a U.S.-listed Chinese reverse-takeover stock that has been accused of overstating the value of its business.

"In general, smart people sometimes make mistakes in terms of investing," said Stephen Foerster, a professor of finance at the Richard Ivey School of Business at the University of Western Ontario.

"If you look at investor track records, if you're right 55 per cent of the time, you're considered to be a very astute investor. We tend to forget that even the Warren Buffetts have made bad bets in the past … no one has a perfect track record."

He said that the current markets have been particularly complicated by one big wild card: The U.S. Federal Reserve Board's quantitative-easing programs, in which the U.S. central bank buys financial assets to juice up the money supply and liquidity in financial markets.

"How active the Fed has been … is really making for an unusual marketplace - making it harder to assess what direction inflation is going," Prof. Foerster said.

While Mr. Paulson and Mr. Greenberg both got hurt by China-based investments that now look to have been less than advertised, their investments may also speak to investors' recent willingness to take on increasing risk as the markets have rebounded and people seek superior returns.

Prof. Foerster said some of the huge initial public offerings in the Internet sector may also be a sign that investors are losing their perspective on risk.

"Maybe we've forgotten the lessons we might have learned in the tech bubble," he said.

"The environment has simply become too risky to justify prudent investors hanging around, hoping to get lucky," said Jeremy Grantham, well-known chief investment strategist at U.S. money manager GMO LLC, in his latest quarterly letter to clients.

Mr. Grantham believes investors should "be prepared to be early" - to exit overvalued positions and/or buy into undervalued ones before they have clearly bottomed or topped, rather than roll the dice that you can squeeze a bit more out of the trend. He acknowledged that his own current recommendation - to bet against the U.S. equity market - may be "two years too early," but he prefers that to running the risk of being caught too late.

And that may well be what has caught some of the big names in the investment world recently - their calls may yet prove to be correct, but they're just too early with them.

"Value investors in particular have very strong convictions," Prof. Foerster said. "They can be underperforming a market for extended periods of time, but eventually will more than make up for that.

"It can be a case of, in the short run, being on the wrong side of sentiment," he said.

"If you are a value manager, you buy cheap assets. If you are very 'experienced,' a euphemism for having suffered many setbacks, you try hard to reserve your big bets for when assets are very cheap," Mr. Grantham said. "But even then, unless you are incredibly lucky, you will run into extraordinarily cheap, even bizarrely cheap, assets from time to time, and when that happens you will have owned them for quite a while already and will be dripping in red ink."

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