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Monday, December 26, 2011

Market Predictions

This is the season of predictions and forecasts.  Pundits are getting a lot of air time and magazine space trotting out all kinds of charts and esoteric facts to support highly specific predictions on where markets are headed.

If you are like a lot of investors, you will be impressed.  In fact, crystal ball seers in the market are usually introduced by citing a time in the past when they made accurate predictions. 

What should you make of them?  Sometimes potential clients reel off well-known pundits' names and their forecasts.  They say so-and-so says the market is headed higher/lower or gold is going to $ _____/oz. etc.  They want to know what I think.

I patiently explain that I can get super smart, very articulate people to give well-reasoned, highly-believable arguments on both sides.  Jeremy Siegal (author of Stocks For the Long Run), for example, will argue forcefully that stocks are headed higher while Bob Shiller (author of Irrational Exuberance) will take the opposite side and say that now is not a good time to buy. 

What you don't see are all those in the gutter because their predictions turned out horribly wrong.  You won't see Miller, Paulson, Berkowitz, et al.  Sometimes this gets through; often times it doesn't.  After all, some people have their whole view of investing grounded in predicting which stocks and which sectors will do best.

If I thought forecasting was useful, I'd probably go with the most recent presenter given that they are so persuasive.  But I don't think it is useful.  In fact, it is harmful, IMHO, because many times investors use these forecasts as a  substitute for thinking; and when forecasts start to go awry, emotions come into play and the investor is set up for a stressful period that typically ends badly.

Larry Swedroe is the director of research of Buckingham Asset Management, LLC and a well-known proponent of index investing.  Here is his response when asked to make a forecast of macroeconomic events:
 From interview of  Larry Swedroe by "Seeking Alpha":

SA: Global Macro considerations dominated the headlines in 2011. Do you see 2012 unfolding differently? If so, how?
LS: Yes, it is always different, but my crystal ball is always cloudy. So I don’t make forecasts. Investors should learn what Warren Buffett knows: A market forecast tells you nothing about where the market is going but a lot about the person doing the forecast.
       There are good studies on the ability to forecast and the only thing that correlates with accuracy is fame, and the correlation is negative:  The more famous the forecaster, the less accurate the forecast.


  1. I own one of Larry's books: The Only Guide to a Winning Investment Strategy You'll Ever Need: The Way Smart Money Invests Today. Truly a fantastic read!

  2. Most pundit's predictions are so astoundingly wrong it is amazing that they still get paid to make predictions.