Reading Forecasts, Knowing They’re Wrong

Price targets are mostly useless for their inaccuracies. Bad forecasts can be devastating, bullish when returns are poor or bearish when returns are good. Anyone who blindly follows market forecasts may have had good results, if they followed the bullish viewpoints. Bearish takes have been right about 25% of the time so any of those followers have missed out on the upside for most time.

Even the smartest analysts can’t predict the future and no matter how well thought out a forecast, it will be wrong. Putting too much faith into a “sure to be wrong” prediction can lead to bad investment outcomes.

Everyone, including the market predictors, knows this is an asinine exercise, yet every financial firm publishes a prediction. Even more amazing, these are the types of blogs, newsletters, and letters to clients that get the most attention.

I think most people know that even the best market strategists can’t be 100% right. But at least be 50% right.

CXO Advisory Group graded the predictors and on aggregate, they are right only 47% of the time. Impressively, they’ve compiled prediction market publications and graded whether they were accurate or not. Some market “gurus” are only right 20% of the time! An investor would only need to do the exact opposite and be vaulted to the top tier of being 80% right. (Please don’t do this)

The data used to grade predictions ranged from 1998-2012. Even though the latest prediction is over a decade old, the aggregate assessment still holds true. Gurus suck at predicting the future.

The best predictors (~12% of the graded gurus) were right about 60%-68% of the time and they all had one thread in common, and that was being consistently bullish. The market has had positive yearly returns 75% time, with data going back to 1926 to 2018.

I don’t know if the top guessers were right because of luck or skill. It is very likely they were accurate because their predictions were coincidental and rode the upward wave of the markets. To be fair, I have not yet identified a skill that accurately predicts the future, fortune tellers aside.

So why continue to read them?

It’s likely that people are looking for guidance and will glam onto those who they agree with and dismiss the ones they don’t (confirmation bias).

The predictors have market influence. Either they manage money directly or they have enough followers to move markets. There could be some impact due to their expectations, i.e. putting money where their mouths are.

There’s folly in this thinking. Jim Cramer was credited with market moving predictions but they turned out to be short lived. Prices would initially spike and then come back down.

Timeline and specifics matter. How useless has it been when a bearish talking head says, “the sell off is coming” and has been saying it since 2011? Bull or bear calls could be right…eventually. The number of months or even years on the sidelines waiting for a sell off can be debilitating.

Anyone who reads market forecasts can still glean useful information. You can get an idea about where the markets have recently been. Most forecasts don’t come from nowhere. The best in the business looks at the fundamentals driving business and economy. I live in California where the economy and outlook are skewed from the rest of the country and the rest of the world. Reading a reputable market forecast can help pull me out of my California bubble.

I’m also optimistic about the world economy and many global stock markets. A person like me would benefit from reading a pessimistic viewpoint. What are others seeing that I’m not? If someone makes a compelling case, it doesn’t mean I jump in with both feet. The goal is to challenge my predisposed thinking.

Diversification of opinion can be just as important as diversification of assets. We pull from a few dozen institutional sources and have an internal committee to bring different opinions and viewpoints. I’m not saying individual investors should go this far but it is important to have a wide range of ideas.

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