In their paper Evaluation and Ranking of Market Forecasters a team of statistical researchers from the U.S. and Australia sought to rank the accuracy of 68 prominent financial forecasters.
The study looked at 6,627 predictions made over a 14-year period about the S&P 500. The time frame of the predictions varied from three to twelve months.
What the study found was that about two-thirds of the forecasters had an accuracy score of less than 50%. Statistically, you’d be better off flipping a coin rather than following their advice.
All these experts are paid to make these predictions, both for private clients and the financial media. But maybe it’s the relatively short-term timeframe that makes accuracy so difficult.
John Maudlin, a well-known author and market analyst who was included in the study said, “an annual forecast . . . is as much a guessing game as anything else (and I am bad at guessing games).”
So Larry Swedroe, director of research for the BAM Alliance advisor consortium, took a look at Maudlin’s five 5-year forecasts he made in 2015. When you read them, Maudlin’s predictions sound entirely reasonable, especially when he gives the specific geopolitical conditions that are sure to bring them about.
For example, his first prediction was that stagnant conditions in Japan would lead to a significant decrease in the value of the yen relative to the U.S. dollar. He gave this a probability of 90%.
However, since the beginning of 2015, the yen has done just the opposite, gaining 9% against the dollar. Despite the high percentage of certainty he gave for the other four predictions as well, Maudlin was wrong on each.
These ranged from China’s economic impact to the performance of the U.S. stock market. It seems the key to being a respected market forecaster is never having your predictions analyzed after the fact.
It’s telling that the researchers noted in their forecaster accuracy paper that one of their biggest challenges was the tabulation of the pundits’ predictions.
In other words, nobody is keeping score.
As a prudent investor your takeaway should be that it’s nearly impossible to foretell what the market will do over any time period. And so when you hear even the most scientific sounding predictions, you should receive them with a grain of salt.
This could save you both emotional distress and negatively affecting your portfolio returns.
This is why, one of my favorite investment quotes is from Paul Samuelson: “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
Let’s get the strategy, diversification and allocation right. Then leave things alone and let the process work!