Market Forecasting Is Folly!
Market Forecasting Is Folly
Last month we added a cash position to our efficient frontier. The effect was to lower our expected risk and expand the range of expected outcomes for our available set of portfolios. One of the key words we have been using is this idea of “expected” outcomes. There is an intentionally non-specific meaning to this word because it lies in the gray area between wild guess and ironclad guarantee. The market forecasters of the world make big headlines around this time of year similar to how meteorologists make predictions about the snowfall before winter in the northern US. The big question is: are these forecasts remotely accurate? The quick answer is: kinda, sorta, not really.
Source: https://www.cxoadvisory.com/gurus/
What About The Data
There are numerous investing roundtables and guru retreats that lure us into the fire of predicting the future. Those of you who have seen me at events around this time of year know that I have a few canned market forecasting jokes.
I am very sorry, but my crystal ball is in the shop.
The market will go up and the market will go down - but not necessarily in that order.
My main goal is to be less completely wrong than most other people over a long period of time.
This last one is where some data can add context to our discussion. There have been countless studies over the past several years attempting to track the accuracy of market predictions. The overall results are that market predictions are collectively less accurate than a proverbial coin toss over a long period of time.
Source: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2944853
The most striking point about the table shown above is that some of the most famous forecasters (Jim Cramer, for example) are less accurate than a coin toss. The ones shown in italics are the ones out of the top 10 with whom I am most familiar. I have seen some of them speak at investment conferences and they have given amazingly persuasive presentations with seemingly intelligent insights gleaned from very expensive data sets.
Then Why Bother Forecasting?
The most important piece to the investing puzzle is consistency. Consistency is built over time and over time we have the miracle of compound interest working in our favor. The key to consistency (like the McDonald’s business model) is not seeking to be the best - or the cheapest - but to be the most efficient. There is an old saying: the best way to predict the future is to create it. By putting a stake in the ground and dancing around it, we build faith that our beliefs will bring us to that future. In many aspects of life, this is a self-fulfilling prophecy.
The market forecasts are the most critical inputs to our asset allocation models. We know in our brains that they will be inaccurate, but we also know using an asset allocation model over a long period of time is MUCH better than using our stomachs to make investment decisions based on the daily drama of financial headlines.
Source: Yahoo! Finance, JQR Capital
My main goal is to be less completely wrong than most other people over a long period of time. - James Q. Rice
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Disclaimer
Past performance is no guarantee of future results. Any investment involves some amount of risk and may not be suitable for all — or any — individuals. You should consult with your investment advisor before acting on this — or any — financial information.
References
https://www.cxoadvisory.com/gurus/
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2944853
https://www.wealthmanagement.com/equities/inaccuracy-market-forecasts
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