Predictably Hopeless

The ever-quotable Yogi Berra once said, ‘I never make predications, especially about the future.’

It’s a mantra the finance industry has studiously ignored. And why wouldn’t it?

A large chunk of the finance industry is all about prediction. Economists try to guess how fast the economy will grow, whether inflation will rise, and what will happen to interest rates.

‘Equity strategists’ guess what will happen to stock markets 12 months hence.

The thing to keep in mind here though is that all these predictions are designed to sell something. Mostly, they’re designed to sell assurance. If you’re assured, calm and confident about the future, you’re more likely to invest in fee-generating assets.

But finance professionals are no better at predicting the future than anyone else. It’s just that they have a far more captive audience. People want to believe.

And of course, the stock market and the economy is all about prediction. People want to know what is going to happen. People want to know if and when the market is going up.

The problem is, we are mostly rubbish at predicting what will happen. Finance professionals, like everyone else, aren’t very good at predicting the future.

That goes for Wall Street big shots as well. As the Wall Street Journal writes:

We all like to remember our successes and forget our failures, and finance is no different. As investors’ inboxes once again become clogged with annual outlooks from Wall Street’s scribblers, there is little admission of the nearly universal failure to predict what happened this year—even though the things the analysts missed are much more interesting than their forecasts.

There are two big lessons to learn from the mistakes of the year-end crystal-ball gazing. The first is that when everyone agrees that prices can only go in one direction, it is dangerous. The second is more nuanced: We really know an awful lot less about how the economy works than we thought.

According to the article, this time last year everyone thought the Trump reflation trade would push bond yields higher. That didn’t work out. US bond yields actually fell slightly this year. The US dollar fell, instead of rising as everyone expected. And the S&P 500 rose more than twice even the most bullish forecast this time last year.

In other words, last year’s predictions were an all-round debacle.

Not that anyone seems to mind. We quickly forget and eagerly move on to wondering what these same people think will happen next year. 

Despite us knowing that these forecasters really have no clue, we want to believe the world is more certain than it really is. Believing gives us comfort. It provides an anchor for us to base our own decisions on.

The funny thing is, the predictors often try to rationalise their own errors after the fact, instead of just admitting they haven’t got a clue. From the Wall Street Journal article:

Like many others, Alan Ruskin, Deutsche Bank’s global co-head of FX research, started the year recommending investors bet on “the American dream” via a stronger dollar. He says one mistake was not factoring in that everyone was betting on Mr. Trump’s policies. The widespread consensus created an outsize risk of being wrong when the policies weren’t implemented.

Mr. Ruskin draws an interesting lesson from the failure of bond yields to pick up this year. Yields were held down by the $4-trillion pile of bonds held by the Fed, he reckons—in other words, it matters more how much the Fed holds than how much it buys or sells.

So he got it wrong because existing conditions made it likely he would be wrong. Conditions that he didn’t consider, even though he knew about them.

Which reminds me of an old market adage: If you’re going to predict, predict often. The more predictions you make, the more likely you’ll have one or two correct ones to selectively pick out and crow about.

The other option, the one that I favour, is to make a prediction while at the same time admitting that you really have no idea whether it will come about or not. It’s an educated guess.

Doing so may destroy any aura of omniscience you’re trying to cultivate. And it may lead some people to think you have no idea what you’re talking about (which is true).

But at least it’s honest.

The funny thing is, despite year after year of failed predictions, we’re always willing to believe again. If a prediction is delivered with conviction, it is far more ‘believable’ than one delivered with the caveat of ‘I don’t really know’.

So keep that in mind as we head into ‘prediction’ season. That is, the greater the conviction, the greater the likelihood of it not playing out.

And keep in mind that the best prediction to make, or follow, is the one that no one else is making. As long as you know that is probably wrong too!


Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

Official websites and financial e-letters Greg writes for:

Money Morning Australia