…will win the Super Bowl
____________________ will win the Super Bowl. ____________________ will win the Oscar Award for Best Picture.
Making predictions is fun and relatively painless if you are wrong when forecasting things like football games and entertainment awards. The stakes are raised when you invest based on financial market predictions. In Oak Wealth Advisors’ annual search to find a source of consistently accurate financial forecasts, we have uncovered the following:
This long-term study indicates that investment manager outperformance is not persistent. In fact, many of the worst performing stock-picking firms in one period are the ones that outperform in subsequent periods. While there were a few firms that outperformed in consecutive periods, there were no identifiable factors that would indicate which ones they would be. With a lack of persistence in outperformance, the authors conclude that passive indexed investing strategies are superior to active management approaches that rely on stock picking skills.
Fifty leading economists were asked around the middle of 2009 for their estimates of the yield (interest rate) of the ten-year U.S. Treasury note a year later. Essentially, the economists were being asked if interest rates would be rising or falling over the next 12 months. At the time of the survey, the yield was 3.52%. Forty three of the fifty economists expected rates to move higher to an average rate of 4.13%. Seven expected rates above 5%. Only two of the fifty predicted rates to be below 3%. On June 30, 2010, the ten-year U.S. Treasury note had a yield of 2.95%. Clearly, not even the market experts have the ability to predict the future.
Morningstar provides objective mutual fund information and subjective mutual fund ratings. Beginning in 2009, the Burns Advisory Group researched Morningstar’s recommendations over the prior decade to determine how accurate their ratings are at predicting the future success of mutual funds. Morningstar applies a star rating to mutual funds, with the highest rated funds receiving five stars and the lowest rated funds receiving one star. Of the 248 funds receiving a five star rating in 1999, only four were still receiving that rating ten years later. 87 of the 248 five-star funds were no longer in existence. Of the funds still in existence, the average rating of the former five-star funds was just below three-stars. The average performance of the funds originally rated as five-stars was less than the average performance of all peer funds. Even highly respected Morningstar is unable to accurately predict which funds will outperform others.
Reporter Brett Arends recently worked with Thompson Reuters to study stock market analysts’ highest conviction recommendations for market outperformance and underperformance. Thompson Reuters collects analyst forecasts from all over the globe. For 2010, their top ten “buy” recommendations returned 24%. The S&P 500 returned just bit over 13%. This sounds great until you learn that the ten stocks they expected to be the worst performers returned 32%. For 2009, the highest rated stocks returned 22%. However, the S&P 500 returned 26% in 2009. The stocks they expected to perform the worst in 2009 returned 70%. Their record was no better in a down market year. In 2008, a year in which the S&P 500 fell 39%, the analysts’ top picks fell 48%. Their least favorite stocks fell 51%. In looking over multi-year periods, Arends found similar disturbing results. His conclusion, with which we concur, is to ignore the stock recommendations of investment “experts.”
One of the most widely reported financial predictions in 2010 was the Hindenburg Omen which is attributed to Jim Miekka, a blind physics teacher, who started an investment newsletter. His models had great accuracy in predicting prior events. The media widely reported his market meltdown prediction at the end of August. Immediately following his forecast of doom, the S&P 500 advanced 8.92% in September. This was the best September stock market result since 1939. In fact, the stock market went on to rise almost another 11% in the final quarter of 2010, leading to a return of 20% in the four months following the market meltdown prediction.
Maybe not surprisingly, objective research continues to suggest that it is not possible to predict the future of the investment markets or which stocks will outperform others. We can use known economic factors and other data to determine if conditions are more or less favorable to different types of investments, but the inability to know what will happen in the future makes it impossible to forecast future investment returns with any certainty.
Investors are much more likely to enhance their results by focusing on elements that they and their advisors can control. These include managing exposure to market risk, diversifying, and minimizing costs and taxes. Working with investment advisors who have disciplined, consistent approaches to investing, and who provide transparency in what they are doing should help you avoid negative surprises in your portfolio. Portfolios managed for tax-efficiency and cost-effectiveness continue to deliver the best net results for investors.