The problem with predictions

6th January 2012

For example, this CNN survey from the beginning of 2011 states that: "not one of the 32 experts surveyed by CNNMoney think the S&P 500 will decline this year". In fact, the S&P was flat in 2011. The survey also found that the consensus believed that industrial stocks would be the best-performing and utilities the worst. The reverse was true, with industrial stocks showing a small drop during the year, with utilities one of the better performers.

A similar picture was seen in the government bond market. At the beginning of the year developed market government bonds found themselves largely friendless. Many believed that they were likely to be hit by rising interest rate expectations. As it was, economies weakened, quantitative easing resumed and economists and analysts were forced to revise their forecasts. The government bonds of the major developed markets were the best performing asset class of the year.

The market environment also confounded many of the market gurus. Ken Kurson wrote in Esquire at the start of last year: "I think the markets are about to make a run similar to the one we saw in the late 1990s. I believe it is smooth sailing till at least Dow 13,500 or so. And I believe we're going to experience a 2011 that will look very good for stocks." The Dow Jones is currently at 12,418 and it has been far from smooth sailing.

Part of the problem is the nature of media. Experts who make more extreme predictions tend to get the headlines and many will bank on investors forgetting their predictions by the following year. Also, many believe predictions – certainly indices predictions – are a fool's game. As community commenter gamesinvestor points out in this piece from the Telegraph : "I predict that those who make predictions will get those predictions misaligned with the predictions of the others in the group making the predictions and thus predicting away from the mean of predictors. That's my prediction!" Grincher says: "Many of these experts are looking at the last 6-months and saying more of that. It really serves no purpose."

One group has attempted to find a solution. CXO Advisory has graded the self-styled ‘gurus' of the investment industry on the grounds of the reliability of their predictions. Each is given a percentage rating for accuracy. The highest score is David Nassar, who had a column in the Wall Street Journal's MarketWise.

The data could be contentious. It only covers a relatively short period of time, excluding – in some cases – the impact of different market cycles, though the group points this out. Some of the gurus are no longer writing, including Nassar. The most recent high evaluation has been that of Ken Fisher – columnist for Forbes Magazine.

With that in mind, perhaps it is worth listening to what Fisher has to say for 2012. He's one of the relatively few optimists: "Of the 21 election years since the S&P index began, 17 were positive. That's 81%, and the average total return during those election years was 10.9%. Dig deeper and you will see that when we re-elect a Democrat, the total return averages 14.8% and when we elect a new Republican the total return averages 18.8%. Either way investors win. The process itself increases optimism, and that boosts stocks."

It is noticeable that he is positive where the consensus is negative. If there is a conclusion to be drawn from the predictions each year, it is that the consensus is usually the worst predictor of market movements. 


More on Mindful Money

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Lies, damned lies and investment statistics

5 Trends: Can futurists help investors pick the winners of 2012?

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