Can You Trust Market Forecasts?

“We have two classes of forecasters: those who don’t know, and those who don’t know they don’t know.” — John Kenneth Galbraith, economist

When will the next recession hit? Where are interest rates headed? Which stock will perform best over the next few years? Americans pay millions every year to advisors, economists, and pundits for answers, and many claim to know them. But is there credible data suggesting anyone can reliably forecast outcomes?

Warren Buffett said it best: “Forecasts may tell you a great deal about the forecasters; they tell you nothing about the future.”

A 2017 joint-research effort between Harvard, Oxford, and Brown Universities suggested (not for the first time) that ignoring everything so-called “experts” predict could actually produce superior investment results. Over the last 35 years, U.S. company stocks seen as sure winners by analysts on average performed much worse than the stocks analysts predicted to flop.

From 1981 to 2016, the top 10 percent of stocks analysts were most hopeful about generated returns 12 percent lower on average (annualized) than the 10 percent they were most pessimistic about. Had you invested $100,000 in the stocks analysts were most optimistic about, it would have grown to $281,386. The same $100,000 in the stocks they were most pessimistic about would have grown to $13,317,552 — a difference of over $13 million.

A study by the CXO Advisory Group examined 6,582 individual market forecasts made by 68 well-known “gurus” from 2005–2012 and found only 46.9% proved accurate. Said differently, there are better statistical odds of simply flipping a coin than placing credence in expert forecasts.

We live in a time when irregular and unplanned events are a certainty — fiscal and monetary policy, geopolitical conflict, technological developments, natural disasters, even a single tweet can alter capital markets. I’m confident neither I nor anyone else can forecast the cyclical economy, time the markets, or say with certainty which fund will outperform its peers.

It’s not always easy tuning out the noise, but there are ways to mitigate the effect of prediction and prophesy:

An investment philosophy that requires knowledge of the future is fundamentally flawed. Beyond historically accurate facts, the rest is a guessing game played by those pretending they know something they don’t. It’s time this industry stops pretending.