One of the usual disclosures in the world of finance is “investing involves risk, including loss of principal”. Wouldn’t it be nice if there was an investment guru we could look to for advice on what the stock market was going to do in the future so that we could lower the odds of losing money we’ve invested?
There is certainly no shortage of gurus to look to. Every large investment firm has economists publicly making predictions and there are many who sell newsletters with their predictions. How do we know which of these forecasts to listen to?
We don’t listen to any of them.
The fact is that the data overwhelmingly shows that those making stock market predictions are no better than a coin toss. There is no consistency either, it’s not the same gurus who are correct each year, it is random. The documentation abounds with a simple Google search, but here are the conclusion of the most thorough studies we found.
CXO Advisory Group studied over 6,500 predictions from 68 different investment gurus who made public predictions between 1998 and 2012. The average guru accuracy was just 47%1.
It can be somewhat difficult to judge the accuracy as these gurus will often use vague language such as “distinct possibility” or the famous “40% chance” prediction in which you can’t really be wrong. If it is a correct prediction you can say ‘see, I told you it could happen’ but if you were wrong you could say ‘I didn’t say it was likely to happen, just that there was a chance’. As Philip Tetlock, a professor at the University of Pennsylvania’s Wharton School says, “pundits and gurus master the art of going out on a limb without going out on a limb”.
Similar to CXO’s study, Morgan Housel looked at the average S&P 500 forecast from 22 chief market strategists of the biggest banks and brokerage firms from 2000-2014 and found that, on average, the annual forecasts missed the actual market performance by 14.6%2.
It isn’t hard to understand why this is so for gurus at large investment firms. As Barry Ritholz explains, “career risk tends to keep equity strategists more circumspect. Typically, these forecasts are for continued gains or solid growth, or softness and modest corrections.”3 The forecast of solid growth or possible softness sounds reasonable enough, but they still miss by 14.6% per year.
What about investment newsletters? Are the gurus writing them more accurate?
The first thing to know is that, as Jason Zweig, the author of the Wall Street Journal column ‘The Intelligent Investor’ says, “newsletters operate on the fringe of securities law and can say just about anything they want to without immediate consequences.”4
Mr. Zweig came to this conclusion while researching an investment newsletter, promoted by a prominent personal finance expert, in which several critical misstatements were found. After Mr. Zweig raised questions, the newsletter did print corrections and cited typographical errors. Oddly enough, none of the typographical errors made the newsletter performance look worse than it really was.
Still interested in investment newsletters? The Hulbert Financial Digest is the best-known source for tracking the performance of these gurus. When Mark Hulbert was asked what he has learned by tracking the performance of the model portfolios he has created based upon the investment newsletters he said, “the depressing thing was to discover how little persistence there was between the past and the future.”5
A similar result is found when reviewing the performance of active mutual fund managers that have been top quartile performers. See #3 in.
We also recommend that post if you have come to the conclusion that following the advice of an investment guru just isn’t for you.
2Source: Would you let a mystic manage your investment portfolio, Washington Post 11/28/15 by Barry Ritholtz
3Source: Fun with Forecasting, 2018 edition! By Barry Ritholtz
4Source: Wall Street Journal, The Intelligent Investor column, 1/21/12 by Jason Zweig
5Source: AAII Journal, Observations from Decades of Tracking Investment Newsletters, John Bajkowski, Charles Rotblut and Mark Hulbert
There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.