Financial Advice from Capital Asset Management
| The Value of Forecasters and WeathermenThe only value of stock forecasters is to make fortune tellers look good. — Warren Buffett
Investors are bombarded daily by market forecasts. Because the predictions generally come from intelligent-sounding individuals, with fancy titles, making seemingly compelling arguments, investors are often influenced by them. But do these forecasts have any value?
In 1985, corporate consultant William Sherden, preparing testimony as an expert witness, analyzed the track records of inflation projections by different economic forecasting methods. He then compared those forecasts to the "naive" forecast—projecting today's inflation rate into the future—and found that the naive forecast proved, to his surprise (since he was a so-called expert), to be the most accurate.
That led Sherden to review economic forecasts made from 1970–1995 and publish a book on his work entitled The Fortune Sellers. One of his findings was that economists could not predict the important turning points in the economy. Of 48 predictions (made from 1970-1975), 46 missed the turning points. He also found that even economists who can influence the economy — the Federal Reserve, the Council of Economic Advisors, and the Congressional Budget Office — had forecasting records that were worse than pure chance. He also concluded that there are no economic forecasters who consistently lead the pack in forecasting accuracy. Even consensus forecasts did not help.
Sherden also studied the performance of seven forecasting professions: investment experts, meteorology, technology assessment, demography, futurology, organizational planning, and economics. He concluded that while none of the experts were very expert, the folks we most often joke about—weathermen—had the best predictive powers.
Reviewing the results of 2003, the best year for equity investors in the last quarter century (since 1975-1976), provides a concrete example of why prognostications about the stock market should be treated as investment graffiti. U.S. large-cap stocks rose in excess of 25 percent. U.S. large-cap value stocks and REITs (Real Estate Investment Trusts) rose in excess of 30 percent. International large-cap value stocks rose in excess of 40 percent. U.S. small-cap, international small-cap, and emerging market stocks all rose in excess of 50 percent. And U.S. microcap and international small-cap value stocks rose in excess of 60 percent.
Yet almost no one had forecasted a bull market let alone the kind of returns that were experienced. Worse, if investors had a clear crystal ball, allowing them to foresee the events that would occur they surely would have forecasted a bear market. Let's review some of the major events of 2003. We had an ongoing war in Iraq, an outbreak of SARS, major corporate and mutual fund scandals, record trade and budget deficits, a renegade North Korea, escalation of the Palestinian-Israeli conflict, the threat of deflation, and a "jobless" recovery. Those events sound strangely familiar to the current events of 2008.
Thus, even with a clear crystal ball on the news, investors almost surely would have missed one of the great bull markets of all time. The conclusion is that it is best to ignore the market forecasts of Wall Street strategists. Hopefully the evidence will illustrate that there are three types of market forecasters: those who don't know where the market is going; those who don't know that they don't know where the market is going; and those who know they don't know, but get paid a lot of money to pretend that they do. The best strategy for all investors is to remain with your current plan that is based on your individual goals, objectives and risk appetites. If your advisor did not create your plan based on these criteria, please call us at (812) 288-2881.
This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice.
For more information on this topic, or to discuss how we can be of help to you, please feel free to contact one of our Investment Advisors with Capital Asset Management, LLC.
Capital Asset Management was founded in 2000 by the partners of McCauley, Nicolas & Company, LLC. CAM is a registered investment advisory firm providing investment services and solutions for high-net-worth individuals, trusts, charitable organizations, businesses and qualified retirement plans. More information on CAM's philosophy and services is online, www.camadvisors.com. |  
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