dreams of the west coast...

unusual predictors

my friend dihard encouraged me to start posting on tumblr, where she recently wrote about how the orange juice futures market is a better predictor of Florida’s weather than the National Weather Service. That got me thinking about other unusual predictors and reminded me of a study designed by Ray Soifer, a retired executive from Brown Brothers Harriman, which argues that the post-graduate plans of Harvard Business School grads is an accurate predictor for bear markets. According to Mr. Soifer, when 30% or more of a graduating class take Wall Street jobs, it’s a sell signal that the market is overheated. He also notes that when 10% or less of a graduating class take Wall Street jobs, it’s a long-term buy signal (the last time this happened was in the early 1980s, when the DOW traded below 1,000…but I doubt this will ever happen again)

How does his indicator stack up? In 2006, 37% of HBS grads took jobs in the securities business, rising to 40% in 2007 (subprime fiasco). The previous “sell” came in 2000, when 30 percent of graduates went to work on Wall Street (dot-com bust). And prior to that? 1987 (Black Monday crash).

Why does this happen? It’s not that HBS students are uninformed lemmings who charge blindly along one after the other over the cliff. When I visited, two professors told me on separate occassions that they often hear criticism that their graduates don’t take risks. He said that HBS students have been successful all their lives—they got that good SAT score, they went to that prestigious college, they landed that high paying first job; they’ve followed the path to success their entire lives, and to face the chance of failure for the first time is a scary thing. As another student in the class said, I don’t even want to be an ibanker, but the herd mentality here is strong, and when 400 or 500 of your classmates are going to one of these bank presentations, you go along as well not wanting to miss out.