Over the years, I have discussed how little I care for predictions (see “The Folly of Forecasts“). We have chatted about how poor Wall Street is at making forecasts, wondered why they keep at it and revealed the secret to making better predictions.
But the bottom line is that you humans are terrible at forecasting the future. You are bad at predicting the economy and terrible at forecasting markets. The data shows you can’t even predict your own behavior.
Which leads me to today’s delightful quote, from Jason Shapiro of Perbak Futures Management. Shapiro observes just how wrong our forecasts about the future can get:
“Looking at the markets here I was laughing this week thinking about what the reaction to anyone back in 2009 who said that in five years the following would be true:
Equities basically on all-time highs, interest rates incredibly low, commodities at multiyear lows, and the U.S. dollar as strong as could be.
These predictions would have gotten you thrown out of the room.”
Truer words were never spoken. I recall referring to this chart from Morgan Stanley Europe at an event I was speaking at in the summer of 2009. I noted that following a 50 percent drop in the stock market, the median bear-market-rebound rally was a 70 percent bounce. The room exploded in laughter, as everyone knew that was never going to happen. Everyone knew the bounce off of the lows was a thing of the past. The forecasts were for Dow 5,000 (See Kostin, Gross and Nenner), Dow 3,000, (Denninger and Dent) and even Dow 1,000 (Prechter).
Tuesday’s stock-market selloff was it — we were toast, and no amount of measured, thoughtful discussion was going to relieve people of their worst fears. Wednesday’s rally was the reverse — the worst was behind us, we were fine, nothing to see here, move along.
I did something yesterday I normally shy away from: Presenting aneven-handed look at markets instead of my usual opinionated blather. The reason for that was simple: I have some small degree of self-awareness regarding my ability to forecast the future. I find that recognition of a simple reality — no one has any idea of what is going to happen next — is a huge advantage in the worlds of investing and punditry.
Regardless, many people and more than a few investors seem wedded to the idea that the way to make money is to look into your crystal ball, see what comes next and invest accordingly. If you have been reading me for a few months, you know that is the recipe for consistent underperformance, if not outright losses.
In 2009, we had no idea what 2014 was going to be like. Now imagine what 2019 has in store for us. The safest bet I can make is your five-year forecast is likely to be wrong.
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