Investors continue to be tortured by seemingly conflicting forecasts over the direction of Wall Street. If it will put your mind at ease, I will state unequivocally once again that no one can accurately predict the future of the various financial markets.
And once again my reasoning is quite simple. Buy and sell decisions are made by individuals or increasingly by quantitative algorithms on computers.
In both cases those decisions are based on a compendium of data at a specific moment in time, or what would be called in the quant world, initial conditions. The probability of those initial conditions being repeated is practically zero. Hence the impossibility of predicting a future trend.
Furthermore, Wall Street is not an express elevator to new heights. Short sellers will always be looking to push a button for a lower floor.
Matters are further complicated by the myriad of supposedly “necessary” actions, of which most investors are continually bombarded with. Those supposedly “act now” requests are analogous to the Sirens in Greek mythology. They lure you with enchanting forecasts only to have your portfolio crash on the rocky shoals of poor returns. So, what are you to do?
Before succumbing to the ideas of those who claim to divine the future, consider the words of Patrick O’Shaughnessy. He once wrote that the so-called experts are surrogate thinkers. They think so you do not have to.
We allow such outsourcing because of a psychological bias known as the “halo” effect. The better known a forecaster the greater the confidence in their predictions.
Should you be tempted by what others are proselytizing, consider that a comprehensive study on the topic of forecasting was conducted by Philip Tetlock. In his book “Expert Political Judgment”, Tetlock describes a study of 28,000 forecasts that were made by hundreds of experts in a variety of fields.
Tetlock concluded that not only was the performance of human forecasters distressingly closer to that of a chimpanzee, it was impossible to find any domain in which humans outperformed crude extrapolation algorithms, much less sophisticated statistical models.
A similar study was conducted of investment forecasts. The CXO Advisory Group gathered 6,582 predictions from 68 investment gurus made between 1998 and 2012. The average accuracy was 47 percent, a number that was worse than flipping a coin. Of the 68 gurus, 42 had achieved accuracy scores below 50 percent.
Nonetheless, any downside deviation from a forecast of a company’s profitability results in a spike of anxiety and a hair trigger response in the form of a downgrade. Following shorty afterward is a chorus of phrases such as, over-priced, unrealistic, and further corrections imminent. Which of course is a golden opportunity for the soothsayers of doom to rise-up and further stoke your investment fears.
Key to your self-defense is to improve your self-reliance through research. However, if you are wondering if Wall Street is the Street you should be on, maybe the following will shine a bit of light into that dark abyss we call the future.
Consider the 1970s. Investing back then was a courageous feat considering that the Dow Jones Industrial Average fell from 1,072 in 1973 to a low of 578 in December of 1974. That makes any pull-back in today’s market look sort of puny.
Volatility is part and parcel of Wall Street’s DNA. However, even in 2008 during the Great Recession, the decline was followed by an upward cycle that took the markets to new highs.
Simply put, that is Wall Street. You can develop as sophisticated a model as you want but in the end the essence of it all is that a growing economy translates to increased corporate earnings and higher share prices.
So, what do you do when an “event” temporarily sends share prices tumbling downward? You know the answer. Any pullback is a buying opportunity. Seize the opportunity. Invest in those companies you believe in. A belief that results from your personal research. Those are the companies that will have the greatest potential to generate gains well into the future.
Lauren Rudd is president of Rudd International, an asset management firm. Neither Lauren Rudd nor his employees have plans to purchase any shares discussed within 30 days, nor is there any intended inducement to buy or sell any security. You can write to Lauren Rudd at Lauren.Rudd@RuddInternational.com or call him at (941) 706-3449. For back columns go to www.RuddInternational.com.