The value of forecasts

Whether we're talking about the weather, elections or stock market prices, forecasts by so-called experts are generally no more useful or reliable than a simple coin toss.

And yet, nothing is easier than becoming a true financial market guru. All it takes is one accurate prediction to become a true hero... and forget about the 99 other wrong predictions that never came true. Those who have accurately predicted a stock market crash have usually predicted dozens of others... but with poor timing.

Since the start of the bull market in March 2009, hundreds of overpaid strategists and analysts have been predicting the imminent arrival of the next bear market. Once again, one of these charlatans will eventually be proven right, and will be hailed as a true genius. He will write a book in which he explains in detail how, while drinking his coffee, he guessed that a crash was imminent by observing his cat's sudden disdain for his favorite brand of kibble.

Even a broken clock tells the right time twice a day. Even an incompetent analyst will end up being right one day... as long as he makes at least one forecast a day!

Sometimes, too, a share price will soar just as a famous investor had just announced. But it's not that he anticipated the move, it's just that so many budding investors blindly imitated him and bought that same stock en masse, that they mechanically drove it up! We're talking about self-fulfilling prophecy.

I don't believe in prophecies, fortune-tellers and cheap Nostradamus.

Simple, low-risk, common-sense forecasts are the most robust.The products sold by Nestlé will still be consumed 50 years from now. Will the same be true of Tesla, Facebook and Netflix?

To succeed in the stock market, you mustn't let yourself be swayed by all those birds of ill omen. You have to be independent-minded, and have the honesty to admit that often... you don't know anything. Stay humble and down-to-earth, don't think you're a genius. Diversify your portfolio, buy quality, don't overpay, and above all don't try to find the next Microsoft.

Stock market forecasts also depend heavily on time horizon: The short-term ups and downs of the stock market are much more uncertain than its long-term evolution, because the latter depends on underlying economic trends and growing corporate earnings over the long term, and not on the daily mood swings of speculators.

To convince ourselves of the futility and even ridiculousness of predictions, nothing is more instructive than to review a few that have become famous:

More than a century ago, Wilhelm II (last emperor of Germany from 1888 to 1918) said: "Ich glaube an das Pferd. Das Automobil ist eine vorübergehende Erscheinung" (the automobile is just a fad, the horse is the future).

"The stock market has reached what appears to be a permanent high plateau", said Irving Fisher, professor of economics at Yale University, on October 17, 1929... just a few weeks before the biggest stock market crash in history.

"Believe me, Germany is financially incapable of facing up to a war," explained David Lloyd George (former British Prime Minister) in 1934.

"For the majority of the population, smoking has beneficial effects".said Dr. Ian McDonald, a famous Los Angeles surgeon, in 1963!

But the best forecasts probably come from the world of technology and computing: "640 kb should be enough for everyone" (Bill Gates in 1981). "The Internet is just a hype (by the same author, in 1993). Or: "There's no way the iPhone is going to get a significant market share" (Steve Ballmer, 2007).

By the way, how much do you think the Dow Jones will close at next week? 😉