It’s a Bubble! It’s a Recession! It’s a Crash!

The Secret to Perfect Market Forecasts
No one knows what will happen in the future, so you’re wasting you time paying attention to those who say they do.
Bloomberg, July 11, 2014

When was the last time anyone got good investing advice from the front page of a newspaper or magazine or from a television pundit?

That is the question I have been pondering during this market cycle. Whether it is the price of equities or the state of the economy, I have grave reservations about relying on the usual suspects as a source of insight. This is especially the case when the usual suspects have been so wrong for so long about these issues.

Ask yourself the following questions:

• When has the mainstream media made a timely warning about an imminent recession?

• Has the punditocracy ever correctly identified a bubble in real time?

• When have the public’s perspectives on market valuation ever been right?

Look at mutual fund flows if you want to see how wrong individuals are; check out various valuation methods to see how much bias and data cherry-picking goes on.

Aside from the obvious utility to contrarians, public, media and pundits are simply of no use to me as an investor. And I can make a strong case that the commentariat has cost those who listen to them far more money than they have ever saved. Look no further than the reflexive spasm over yesterday’s Portuguese bank news for a recent example.

What about you Ritholtz? How can you impugn the media and well-intentioned pundits when you yourself are a member of the chattering classes.

To which I plead, “Guilty with an explanation.” You will note a consistent theme in all of my columns and TV and radio appearances:

• I don’t offer opinions about things I don’t know anything about.

• The use of data from a broad spectrum of sources as the underlying basis for discussions.

• A recognition of my own cognitive foibles and a consistent attempt to be self-aware of the limitations and failures of the human wetware.

• I never makepredictions.

On that last bullet point, I must admit to engaging in that sort of tomfoolery in the past. At one time, I was happy to make wild speculative guesses, but it always surprised me when people actually took them seriously. I never did, as you can see in 2005’s “Folly of Forecasting.” But lots of other folks actually do take them seriously, and even make investments based on these sorts of silly prognostications.

So I just stopped. I simply am not in the forecasting business (anymore). My preference is to try to identify some aspects of markets or the economy that is overlooked, and expound on that. I find it more productive and useful than pointlessly speculating about the future.

The reality is that expert forecasts are statistically indistinguishable from random guesses. The funny thing about these predictions is the more specific and confident the forecaster is, the more likely the viewing public will believe them. And even more amazing, the more self-confidenta pundit is, the worse their track record is likely to be, with the least-accurate guesses coming from the most famous pundits, or those who got lucky with one big outlier.

I have a fun experiment I like to do that takes advantage of this cognitive component of forecasting: Tell anyone you care to that you know EXACTLY where the Standard & Poor’s 500 Index or Apple shares or gold prices will be in six months or a year. Tell them you can’t tell them why, but you have the precise information, which you will share with them tomorrow. Feel free to build up a little mystery and suspense as to the source of your knowledge, using imaginative adjectives. Play it up.

The next morning, you will be greeted by a wild-eyed, drooling, crazed trader willing do just about anything for the secret information you possess. That is how much people want to believe just about anything related to what appears to be a high-reward, low-risk outcome by way of a magical forecast.

It’s a cruel but effective way to disabuse people that no one knows what the future will hold.

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Originally published here Bloomberg, July 11, 2014