Hi Guys,
Well it’s New Year’s eve so silly season is at its pinnacle. It is the time for forecasting follies.
Most everyone recognizes the shortfalls of this practice, yet we persist in this nonsense exercise. The evidence clearly demonstrates that forecasters can’t forecast.
Over the last three decades University Professor Phillip Tetlock has tested political prediction accuracy using hundreds of political experts making tens of thousands of forecasts. Their record is a dismal just under 50 % correct. When questioned later and asked what they believe their accuracy was, they overconfidently guesstimated about an 80 % accuracy. In fact, these guys were no better than a fair coin toss.
In the investing world, Alfred Cowles explored forecasting accuracy among the professional class in the early 1930s. His studies yielded yet another example of prediction failures.
Cowles was the researcher who generated the document that questioned “Can Stock Market Forecasters Forecast ?”. He too answered that query in the negative. He concluded that the very best among the study group registered records that were at the “pure chance” level. He further observed that the bottom feeders generated outcomes that were much poorer than a random dice roll. Forecast believers take warning. Here is the Link to Cowles’ work:
http://cowles.econ.yale.edu/archive/reprints/forecasters33.pdfFor a more recent example pf forecasting follies, I’ll once again reference the exhaustive study assembled by the CXO Advisory Group. The study is now complete, and is essentially updated and fully documented. CXO also concluded that forecasters, on average, failed to forecast with any meaningful accuracy above the roll of the dice test. A few of their 68 experts did score in the high 60 % accuracy range. These forecasters were vastly superior to those at the bottom of the pile. Here is the Link to the CXO final summary:
http://www.cxoadvisory.com/gurus/So, why do we continue to forecast the marketplace? One simple answer might just be that it is a fun hobby. I think it is made of more serious stuff.
I believe that it is a necessary function for investors. Investing is all about future returns, and, therefore we need some basis for making an investment decision. Although we often recognize that the projection is imprecise, we make it anyway because it is needed.
Why do we seek guidance from the experts who are so often proven wrong? My answer to that question is rooted in Behavioral research. We need an anchor as a point of departure. The Behavioral wizards have discovered that anchor points are mostly used even when the chosen anchor point is obviously selected randomly. Wow!
A long, long time ago, Chinese philosopher Lao Tzu wisely observed that “Those who have knowledge, don’t predict. Those who predict, don’t have knowledge”.
That’s clearly a clever overstatement. But it should give all investors cause to pause. Most forecasts are not trustworthy.
Let’s be sensible enough to interpret the 2014 market forecasts in the context of that gloomy historical experimental evidence. In many instances, these are pure guesstimates; they have entertainment value and nothing more. Therefore be selective and choose wisely. Like all medical doctors, all market forecasters are not equal. Any portfolio adjustments at year’s end that you are contemplating should NOT be made based on a statistical record of highly inaccurate forecasts.
Well, my MFO writings for 2013 are now done. I enjoyed the many fruitful exchanges that we shared throughout the year. I respect all your sagacity and opinions.
I wish you all a happy, healthy, and prosperous 2014.
Best Regards.
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