Hi Guys,
I recently created a rather mild storm when I proposed that, in general, it is a waste of precious resources (like your limited time) to seek and study financial economic and investment forecasts that are typically generated annually about this time every year. I was unprepared for the soft uproar.
Until now, I had never really explored this topic with any committed research, but I merely based my apparently controversial opinion on generic experiences with such forecasts.
I suppose my upfront biased opinion was likely fortified by a large body of familiar quotes attributed to some very noteworthy and prestigious practitioners and world leaders.
To illustrate, Winston Churchill famously observed that "If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions.” That certainly has been my experience.
It is not extraordinary that as informed private investors we demand the performance track record and financial history for a portfolio candidate mutual fund manager. Yet we do not impose that same rather benign requirement when judging the merits and shortcomings from any forecaster that comes within earshot or eyeshot.
Perhaps the reason for that laxity or oversight is that such minimal scorecards are rarely available. That’s too bad since trust must be established by prior performance assessments. In baseball parlance, all I seek is a well documented batting average.
Many years ago I subscribed to the now defunct Worth Magazine. Each year that monthly magazine published many stock picker selections, sector performance estimates, and market return forecasts from expert consultants, market gurus, and financial writers.
For several years I saved these forecasts and compared them against realized results and new annual forecasts. Accuracy performance was dismal, and the future annual forecast dramatically differed from the previous year’s projections. I wrote to the Worth publishers and challenged them to maintain, to score, and to annually report updates on their predictions. I wanted a scorecard, and to my surprise they acknowledged the request with positive action.
As a minimum, that decision demonstrated courage from an unlikely quarter. Unfortunately, Worth’s assembled experts did not improve with age, and their yearly scorecard remained dismal. Perhaps that’s why they stopped publishing their magazine a few years later.
I still believe that it is essential when establishing credibility that any forecaster owes his public a fair accounting of his prognostications record. Given today’s technology that task is a simple matter.
The questions to be addressed are simplicity themselves. How many experts participated? What was the average prediction? How accurate (mostly inaccurate) were each forecaster’s prediction this last year? What is each forecaster’s accumulated accuracy record? These are not difficult demands.
How did each expert compare to the mean and/or median forecast? How many experts were more accurate than the group average performance? At this moment I’m thinking in terms of “The Wisdom of the Crowds”. Maybe some group herding instincts come into play here.
Some of these questions are being routinely addressed in studies, both academic and in the popular media. Here is a Link to one such study reported by the Cleveland Federal Reserve Bank:
http://www.clevelandfed.org/research/Commentary/2007/0315.pdfIt is interesting to note that the Cleveland Fed is here testing the accuracy of private forecasters while simultaneously ignoring their own depressingly poor national GDP growth rate extrapolations. In a direct way, this is equivalent to “the pot calling the kettle black”.
The authors of the referenced article reinforce my earlier ad hoc assertions with the following summary paragraph:
“We find little evidence that any forecaster consistently predicts better than the consensus (median) forecast and, further, we find that forecasters who gave better than-average predictions in one year were unable to sustain their superior forecasting performance—at least no more than random chance would suggest.”
This conclusion mirrors similar findings from extensive S&P SPIVA and Persistence scorecard studies. Prediction persistency is a challenging chore for any forecaster. The researchers failed to identify any “Hot” hand phenomenon. The future, with its unfathomable Black Swan events, is forever uncertain and eludes our forecasting capabilities.
The Cleveland Fed finding is also consistent with the research that is summarized in the Guru section of the CXO Advisory Group website which focuses on market expert’s stock selection prescience. Over a long timeframe, CXO demonstrates that market wizards struggle to maintain a 50 % accuracy scorecard. Ken Fischer seems to be an imperfect exception, but an exception nevertheless.
Making predictions is easy work; a fair scoring of those predictions introduces the predictor to hell’s fire. Sometimes experts are spot on-target; sometimes they completely miss. Luck often impacts outcomes. Misguided or overconfident forecasters should be held accountable.
I long remember a Forbes magazine article in about 1993 in which global strategy guru Barton Biggs projected an extended US bear equity market; he endorsed a foreign Emerging market exposure. I partially acted on his recommendation. A 3-year Emerging market disaster followed. My portfolio still retains erosive burn scars from that ill-timed move. But I learned.
In summary, the current empirical evidence is overwhelming. From a personal experience perspective, from industry Guru evaluations, from collections of mutual fund management performance assessments, and from academic studies of the economic elite’s forecasting record, the assembled data clearly demonstrates that the experts are no more successful at projections than a fair coin flip.
The game these experts play is very asymmetric in outcome attributions. Their potential clientele bear all the financial risk while a forgiving, uncritical media and forgetful investor cohort permit the myth to continue.
Okay, I accept that my arguments might not be completely compelling. Forecaster prescience and follies are debatable stuff that might inspire MFO discussion further down the road, and maybe even some heated controversy. So be it.
Merry Christmas.
Comments
Indeed, this is an important conclusion. So what does it mean? To invest in a sensible way, we still need to know what the future brings us. The result of this study implies that the only thing that we need to know is the consensus (median) forecast. And how do we know what consensus is if we do not analyze a broad series of individual forecasts? Of course, we can simply make our own forecasts, but chances are they will be much less accurate than the forecasts made by "experts", or the consensus.
In other words, imperfect nature of forecasting and persistent errors made by forecasters does not make forecasting irrelevant.
You noted: Unsure of how you are able to judge the "we". I am not able to make such a judgment towards those here at MFO.
I have little use for those and/or their postions on the extreme left or right, be it a business meeting, politics, religion or whatever any other topic may allow for such a position; but I would leave myself wide open for lack of attempting to understand a related position if I was not open to listening the why's. One may gather the smallest pieces of information, for one's better understanding and knowledge from some of the most unlikely areas. One obviously has to first venture into area, to discover whether there is or is not any value.
I term for myself, that some of this is what the old "liberal arts degree" was inclined to encompass; a broader range of knowledge, that may lend itself to be better understanding of many areas, that may be directed towards a more specfic area of knowledge. I have been in my share of business meetings where extreme views have been presented, especially from a centralized business organization and the corporate folks. These views were going to become actions that would have ramifications upon the whole business plan. What was discovered too many times is that the "planners" did not know, that they did not know. They had a poor understanding of what they thought was the best plan of action. The meeting had benefit of allowing myself and others to enlighten these folks to the "real world" and away from their small cubicles of knowledge. For the simplest of examples: these folks were planning to actions of how to rope a calf at a rodeo; but had never performed the task themselves, had never attended a rodeo, nor had ever been upon a horse. But, they had "book learn'in" and so they must be right; especially with a masters degree in "book learn'in".
Are forecasters and/or the learned investment forecasters always right. Not likely. May there be trinkets of their words that may help anyone of us form a better judgment about our own investment thinking? One would hope so. I, too; would like to discover how the investment forecasters fared with their own portfolios, beginning in late, 2007; and their returns to date from that time frame.
The best benefit I may become to those around me, with whom I chat from time to time; is to "cause them to think differently about, a topic familiar to them, or to cause them to think about a topic that have never before considered." I have to hold myself to nothing less; to become a better person or investor.
What our house may miss, in part; is the "best investment areas of 2013" forecasts which will drop onto the investment world, like leaves from the fall season trees; while we are away from our magical computer device during the holiday period. I suspect there will be more than enough forecasts to view through the month of January, 2013.
Oh, well; I gotta get......already late for today's projects.
Regards,
Catch
Hi Andrei,
Thanks for your thought-provoking reply.
I would caution here against a too rapid rush to adopt a “Wisdom of the Crowds” investment philosophy. It only works sometimes and it would be extremely time consuming and difficult to effectively apply. Here’s why.
You need only revisit the Cleveland Fed study that I referenced. Here is another conclusion that I extracted from that fine report:
“The evidence presented above makes one thing very clear—we must be cautious before relying on what the median economic forecaster predicts, at least with respect to overall GDP growth and CPI inflation.” Within the text, the paper documents that: “…. Since 1983 the median forecast was accurate in only seven years, or about 30 percent of the time.”
That’s not a very strong endorsement for the survey’s median finding. Also, to get a meaningful statistical sample, a large number of credible forecasters must be interviewed. That too is a formidable, labor intensive task.
So, as songwriter Paul Simon sang “Slow down you’re moving too fast”. That’s also the primary theme in behavioral researcher Daniel Kahneman’s seminal book, “Thinking, Fast and Slow”. It is worth getting a copy of that masterpiece; it will help in your investment decision making.
Although rare and challenging to identify before the fact, especially talented investment experts do exist. Long term performance records establish their special abilities. In my original posting I mentioned Ken Fischer. For years he has maintained an average success ratio well above the CXO survey group average. That high standard is likely due to a mix of inherited DNA from his Dad, his educational background, his opportunities, and just a little luck. The luck factor is what causes variability (standard deviation) in his absolute annual performance and his relative performance standings.
Warren Buffett is similarly a prime example of an outstanding, relatively consistent, and sometimes imperfect investor. Buffett documents a group of similar investors who applied the teachings of Benjamin Graham in his 1984 presentation at Columbia University titled “The Superinvestors of Graham-and-Doddsville”. Here is a Link to that classic debate piece:
http://www.tilsonfunds.com/superinvestors.html
So active investors are alive and an elite few are doing well. But their numbers are very limited.
A major issue with “The Wisdom of the Crowds” is the requirement for fully independent individual predictions. The population as a whole tends to quickly adopt herd behavior (trends, fashion, fads). The herd mentality also is pervasive within the investment analyst community.
Analysts fear being singularly wrong. John Maynard Keynes captured the motivation for the herd instinct with his famous quote “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally”. Folks, even professionals, actively seek to be part of the crowd.
The Wisdom of the Crowds book was written as a frontal counterattack to the Charles Mackay classic “Extraordinary Popular Delusions and the Madness of the Crowds” written in 1841. Financial mania and bubbles such as the South Sea bubble and the tulip bulb mania are highlighted in its text as examples of irrational herd speculation that destroyed substantial wealth, especially among the poorer classes. Indeed, there are always two legitimate sides to every debate.
Most folks are quiescent followers. That instinctive behavior is what got the intelligent, hard working, well educated, prosperous population to behave badly during Hitler’s ascendancy to power in depression dominated Germany of the 1930s. Eric Hoffer succinctly encapsulated that natural and normal tendency in his short masterpiece work “The True Believer”: He said that “When people are free to do as they please, they usually imitate each other.” A consensus is not always a good thing.
So Andrei, please do not jump to a premature and unnecessary investment policy. I guarantee you that both the investment world opportunities and your investment priorities will evolve and will constantly change.
Best of luck to you.
The real measure is how do ALL investors who purport to follow Graham's teachings fare compared to the median?
As I noted in the prior thread, I enjoy reading financial articles of all types. If I disagree or agree, at least it's thought-provoking reading and maybe I take something away from the article.
I enjoy reading about companies that I'm unfamiliar with and even if I don't learn anything more than what the company does, it's a place to start if I am looking later for a company in a particular category/sector/etc.
Personally, I have a set of long-term core holdings that - at least currently - I can see holding for at least 3-5 years, and if longer, great. However, if I wanted to add another name, there's a ton of them bouncing around in my head, some of which I'm very familiar with and some I haven't researched - all of which I'm interested in to some degree, but haven't found a place in my portfolio.
Some of those were introduced to me by articles. I can't be aware of every company large and small across the globe, so articles are a good way to be introduced to what a company does and that's a starting point for further research and review. There's a lot that I've found on my own, as I like finding companies in foreign markets to invest in and there's little in financial media online or otherwise that isn't US-centric in its focus. That's a particular irritation - the US financial media is heavily focused on US multinationals and smaller stories in this country or elsewhere rarely get any attention. I haven't watched CNBC in a while, but the general, "What's Apple doing today" focus became infuriating.
Additionally, as for highly respected writers, well, everyone starts somewhere.
"I would caution here against a too rapid rush to adopt a “Wisdom of the Crowds” investment philosophy"
Sometimes the crowds are right, and one has to be flexible rather than being entirely in one camp with the crowds or fiercely on the other side. The crowds, however, move much faster today than they did a few decades ago. The average stock holding period is 5 days, whereas it was 8 years in the '60s (http://www.businessinsider.com/stock-investor-holding-period-2012-8)
As for people who made broader forecasts, it's a fact of life. Additionally, the way that media has changed and the introduction of smartphones and tablets has made it even easier for people both in the business and not to put their thoughts out there for millions to read. Whether one chooses to or not is entirely up to them, but again, I really don't see the problem with reading such articles if you can "filter" them and maybe take away a thought or two.
Even if one disagrees, at least they're thinking, which is more than can be said for the activity of watching most TV programming these days.
"In my original posting I mentioned Ken Fischer"
His performance may be incredible, but his ads are incredibly annoying.
Hi Scott
Thank you so much for participating in this exchange. It benefits greatly from your thoughtful contribution. Your views on the topic are both clearly and concisely presented. Thank you for the considerate effort.
It is obvious that you are a fully dedicated investor. Hurrah for you. You have established a goal and are doing what is necessary to accomplish it. Given your research habits, you have considerably enhanced your odds of achieving your objectives, I greatly admire the planning and the work ethic exhausted to accomplish the task.
It appears that our investment trajectories share some striking similarities, although mine preceded yours by a decade or two.
From the mid-1950s until the early 1980s, my portfolio was entirely composed of carefully researched individual stock holdings, no bond positions whatsoever. I used charting techniques to aid the decision making process. I was both patient and persistent, and held positions for extended periods. I enjoyed modest success (some failures), but was under-whelmed by my performance record.
All this took a considerable time commitment. For example, all my charting was completed with pencil, semi-logarithmic graph paper, and French curves, a hard, labor intensive work load. Computers certainly reduce the work load by several orders of magnitude.
Nearing the end of that period I was introduced to Modern Portfolio Theory and the benefits of broad market diversification. I began to dabble in mutual funds. Over time that dabbing morphed into a full commitment. That transition took about 20 years. I found it hard to completely abandon individual equity selections. The lure of a home run was clearly impossible to suppress.
About 5 years ago I managed to break the eroding chains. Currently, my portfolio is composed entirely of mutual fund and ETF holdings, including a healthy percentage of bond positions.
The primary motivation for the complete deletion of individual stock entities is personal time requirements. I simply am not prepared to expend the considerable time effort needed to properly research and select a well diversified stock or combined stock/mutual fund portfolio.
In the end, I concluded that it is far more time efficient to fully assign that time-sucking task to fund managers. I retain the asset allocation assignment and do monitor the marketplace in a broad global economic and political sense. Economics and politics are deeply intertwined. My overarching policy change is an immensely time saving decision. I treasure that time.
I’m sure you have concluded that your investing outcomes are well worth the time price that you pay for that success. I congratulate you; I truly wish that you continue to enjoy and to prosper from that success. In no way do I even suggest that you follow my road. Each investor must adhere to his own unique feelings, talents, risk profile, goals, and time horizon.
Also, I am not an opponent of the Wisdom of the Crowd. It functions exceedingly well given the proper circumstances. The method seems to have barbell-like potential application. It works under many commonplace conditions, and is a scientific tool deployed under scenarios that defy even complex, but highly uncertain analyses.
I was hired to consult on three such occasions to project likely impact points for unexpected incoming space and reentry hardware and debris. The statisticians who organized the team effort used Kalman filtering techniques to weight the estimates from a few incomplete sensor outputs and from Expert opinion inputs (my partial contribution). The Wisdom of the Crowd helped to reduce the search zone and to locate the hardware. I agree that the Wisdom of the Crowd does work, but not under all conditions.
I agree completely with your assessment of Ken Fischer’s advertisement literature(?, maybe propaganda is a better word).
Once again, thank you for your insightful post. More power to you; more power to all MFO participants ,regardless of investment philosophy, trading tactics or participation proclivities. However, we should all expect to be rewarded for our invested time; no one should play a Mug’s game (profitless or futile activity).
Best wishes for your continued success and for a profitable reward rate for your time commitment.
I wish you a very Merry and magical Christmas, and a healthy and prosperous New Year.