“It is tough to make predictions, especially about the future.” Yogi Berra
Everyone loves predictions! Unfortunately, it is human nature to be attracted to them like moths to flames. Consider that most people watch weather forecasts with high expectations for accuracy only to have it rain unexpectedly on their picnic. Yet they eagerly await the next day’s forecast.
As a society, we attribute expertise and prediction accuracy to virtually anyone given a forum by the media.
There may be no industry with more people offering forecasts with less accuracy on a regular basis than the investment industry. The scariest may be the individuals with no investment expertise and great tans who appear in infomercials touting gold, real estate, or other investments as safe ways to ensure your financial future. Sadly, the continued existence of these infomercials confirms that their phones ring continuously with people seeking the financial prosperity that they promise.
Publications are also laden with “experts” foretelling the future. Business magazine cover stories and mastheads consistently feature hot tips and predictions about what is next to flourish or crash. Amazingly, almost no one holds the publications or the pundits accountable for their predictions.
One recent example is found on the cover of the July 13, 2009 edition of Forbes. While Forbes is a respected periodical, they are not immune from the folly of publishing predictions. On their recent cover, the advice was “Dump Stocks, Buy Bonds”. This was an article penned in June and published the first week of July with a July 13th cover date. July 2009 turned out to be the single best month for the S&P 500 stock index in the last sixteen years. Oops! Maybe they should have waited a few more months before publishing that story.
My favorite case of financial prediction errors was made by the Securities Industry and Financial Markets Association (SIFMA) which has 650 securities firms, banks and asset managers as members. The SIFMA Economic Advisory Roundtable, consisting of the chief economic advisors at 16 of the largest investment banks and securities firms, met in early December of 2007 to offer their wisdom about 2008. The public pronouncements from this esteemed group provide ample evidence that is it impossible to predict the future.
Among the items forecast by the economic experts on the SIFMA board were the stock market, the economy, and unemployment. Their consensus prediction for the stock market was that the S&P would advance by 9% in 2008. Reality is that the S&P 500 had one of its worst years ever, declining by 38.5%. The consensus prediction for US economic growth, as proxied by the growth in the Gross Domestic Product (GDP), was 2.1%. The range of predicted GDP growth was 1.4% to 2.9%.
GDP grew by .4% in 2008 and from the end of 2007 through the first quarter of 2009 had declined by 2.8%. The collective brain trust estimated unemployment at the end of 2008 would be between 4.7% and 5.4%. We finished 2008 with an unemployment rate that was one-third higher than the highest prediction from the leading economists; it was 7.2%. If intelligent economists backed by significant research budgets can miss so significantly with their short-term predictions, why would you ever pay attention to financial predictions?
I find it ironic that many smart people I know would scoff at going to visit a fortune teller and yet would base their investment decisions or relinquish the control of their portfolios to individuals and firms based on near-term and long-term predictions about investment markets and securities. The old axiom, “a fool and his money are easily parted,” applies when you blindly chase predictions.
You may be wondering what the consequences are of following “expert” predictions. If implementing their recommendations leads to dumping one asset class to purchase another, you are engaging in market timing which has been proven in numerous studies to destroy the value of portfolios. The trading costs and income tax consequences associated with frequent trading and market timing are some of the most damaging and least apparent to investors. If you change your investment holdings every time a financial expert predicts a better future for a different asset class or investment, you will regret your approach after a few short years.
Warren Buffet, arguably the country’s most respected investor, once said, “A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting.” Take Mr. Buffet’s advice to heart. Listen skeptically to investment predictions and try to avoid taking action on them.
Oak Wealth Advisors would rather share information about the markets and financial matters and provide guidance about how to benefit from the information than predict the future. Our goal is to execute the financial plans of our clients and provide them with the confidence and additional free time to pursue the things that matter most to them.