Clients who have been with us for years know we aren’t big fans of market forecasts, whether they are made by us or anyone else. Let me tell you why I believe so strongly.
There’s no shortage of self-proclaimed market prophets. You can find them in the investment magazines, newspapers or CNBC. Although they can be entertaining, they provide no real investment value. They do not help anyone make money. In fact, investors who follow them are more likely to lose money than to gain it.
The way the forecasting game works is that the market guru, seer, pundit or executive continually makes forecasts in an attempt to gain public attention. By sheer luck maybe half of these predictions are proven right-meaning that at least half of them are wrong. On the occasions when the forecast turns out to be correct, the forecaster plays it up. Those many forecasts that don’t pan out (and those many investors who are financially hurt by them) are never spoken of again. In truth, you’re much more likely to get an accurate prediction of the future by listening to the weather forecasters. At least they inflict less damage when they’re wrong.
Ned Davis Research and InvestTech recently collaborated to analyze the forecasts of some of the most highly paid and highly regarded market forecasters in the financial industry. This is a small sampling of the findings:
* Out of the 22 high profile panelists on Louis Rukeyser’s Wall Street program for 2001, none predicted the market to close as low as it did that year.
* Out of the 22 high profile panelists on the same program for 2002, none expected the low close at the end of that year either.
* In 2000, at the prestigious Barron’s Roundtable, one of the 11 Wall Street strategists had a forecast that was close to being accurate.
* At the 2001 Barron’s Roundtable, two of the 12 forecasters were close to the actual market year end close.
* In 2002, two of the 11 Barron’s Roundtable participants were close.
* In the 2000 issue of Business Week, 52 of the 55 experts (95%) who forecast the year-end level of the S&P 500 were wrong.
* At the beginning of 2002, Business Week again held their survey of “the smartest players on Wall Street.” The consensus forecast of the 54 participants for the S&P 500 was 1292. The actual close was 32% lower at 880. Not a single esteemed participant came close to the actual close.
These findings may seem shocking to someone encountering them for the first time, but they are far from atypical. This is just a small snapshot of how bad the market forecasting business really is. Yet despite mountains of data that show how ineffective the celebrity market forecasters are, they continue to make their predictions and many unfortunate people continue to base their financial decisions on shoddy, unproven advice.