22 Nov The peril of prediction
‘The only function of economic forecasting is to make astrology look respectable’ – John Galbraith.
We don’t need to look too far to see the folly of foresting. This year alone has offered us a few examples of how pollsters and market forecasters got it horribly wrong, first with Brexit and now the US election.
Even a few hours before the results were announced, many polls showed a sustained lead for Hillary Clinton. Market forecasters predicted a sharp decline in stock markets around the world, should Trump win the election. Not only did Trump win the election, but the market reaction to date has been a far cry from the gloomy predictions. The Dow Jones industrial average, an index of leading US manufacturers, closed at a new all-time high the day after the election!
You’ve probably heard this from us before but it bears repeating; relying on a forecast for your investment isn’t only unhelpful, in many cases, it’s downright dangerous.
Research paper after research paper has shown that the abilities of strategists and economists to foresee the future varies, from merely horrible to embarrassingly foolish. Stanford University psychologist Philip Tetlock tracked 28,000 forecasts by hundreds of experts in a variety of domains and found that the average expert was only slightly more accurate than a dart-throwing monkey. He also found absolutely no correlation between the accuracy of their forecasts and having a Ph.D., being an economist or even having access to classified information! The more bullish they are about their forecasts, the more likely they are to be way off the mark.
In other words, expert forecasts are statistically indistinguishable from random guesses. While forecasters may get it right from time to time, investing based on what pundits say is likely to cost you more money than you’ll ever make from following their advice.
It’s also worth bearing in mind that forecasters have little to lose when then get it horribly wrong. Unlike the investor who acts on their punditry, forecasters have ‘no skin in the game’ as Warren Buffett puts it. The pundits are all too aware that, regardless of the accuracy (or lack thereof) of their forecasts, it’s only a matter of time before the media comes calling for more.
Strangely, the media is now awash with new predictions on what Trump’s presidency means for your investments going forward. We admonish you to simply ignore them. The reality is that nobody knows what will happen for sure.
What we do know is that the investment markets reward patience in the long run. Our approach to investing combines the data we have from the past and present with honesty about the unknowable future. Where others would use forecasts or emotion to guide their decisions, we substitute facts, logic, and reason to create for you a suitable and appropriate investment strategy.
The capital market is the bedrock of capitalism. It has survived two World Wars and several economic booms and bursts. It survived 44 US presidents from George Washington to Barak Obama. And odds are, it’s will likely survive President Trump too!