Hi Guys,
A tsunami of evidence suggests otherwise. Experts never shy away from making a forecast, but frequently fail to forecast accurately.
Active investors struggle and often fail to score market returns. Do active fund managers, institutional investment teams, and advisors do better? Again, the cumulative evidence suggests otherwise. Why?
Alfred Cowles examined this issue in his 1932 research paper titled “Can Stock Market Forecasters Forecast?” He answered No after researching 45 professional investment institutions. Here is a Link to his study:
http://dido.wss.yale.edu/archive/reprints/forecasters33.pdfNot much has changed over time. After years of collecting predictions from a host of market wizards, CXO Advisory Group reports that the average correct forecast hovered around the fair coin toss likelihood. The best among this cohort scored about 2/3 correct calls.
Why do experts keep failing us? Those failures exist in all fields. Here is a Link to an excellent 43 minute video that explores the issues:
Please give it a try. Some of the examples are amusing while others are very serious stuff. Prediction experts David Freedman and Phil Tetlock make appearances.
Real experts need practical real world experience. Not unexpectedly, time erodes the accuracy of any prediction. Jeremy Grantham wisely observed that “We will learn an enormous amount in a very short time, quite a bit in the medium term, and absolutely nothing in the long run”. Time also erodes our memories.
From yesteryear’s shaman to today’s scientists, bad forecasts are endemic in all fields. Buyer beware, so being a little skeptical is the order of every day.
Best Regards.
Comments
Just today I discovered an investment specific interview that addresses the Expert Opinion issues that I posted earlier.
Here is an additional Link that features Josh Brown (The Reformed Broker) who illustrates the likely overrating of expert opinion in financial circles:
http://www.fool.com/investing/general/2014/05/30/interview-with-josh-brown-how-the-punditry-busines.aspx
This 15 minute video interview conducted by Morgan Housel highlights Josh Brown’s book “Clash of the Financial Pundits”. It’s a meaningful example of how pervasive wrong-minded, with its wrongly constructed incentives, investment advice can be.
Still I expose myself to these pundits. Why? I suspect to get a broadly based set of diverse opinions. With enough knowledge about how things work, and with enough experience to mostly recognize and sort the weaker from the stronger arguments, I just might improve my decision making odds. I get to choose and modify according to my own objectives, preferences, and risk profile.
Best Wishes.
Regards,
Ted
Thank you for replying.
Old Joe, thanks for directing my attention to the Barry Ritholtz viewgraph presentation. I would likely have missed it without your alert. I’m not surprised that Ritholtz and Josh Brown share similar market perspectives and strategies since they are tied together at the hip with some common business ventures.
Since in many ways these two guys see the investing world much like I do, I suppose I’m satisfying my confirmation bias by seeking their advice. However, on occasion, I do take issue with some of their market commentary.
Ted, thanks for the atta-boy. I greatly appreciate it. However, my direct aim is not to enhance MFO’s reputation as an excellent fund resource center. Professor Snowball and your many posts sufficiently and admirably serve that purpose. My posts might indirectly, and, in a minor way, incrementally add to that reputation.
Really, my number One reason for posting is to aid novice investors. I’m an unsophisticated meat and potatoes fund owner who trades very infrequently. My concept of downside protection is be traditionally diversified and to hold a sufficient cash reserve to outlast historical market downturns without being forced to sell at market lows.
I have a Second, very personal reason to contribute. At my age, I struggle to retain some semblance of brainpower. Sudoku is one trick that I exercise daily, but posting at MFO is an even better exercise. Some of you guys would say I’m losing that battle. That’s okay; I enjoy the challenge.
Best Wishes to both you guys.
MJG: With you on that one!
OJ