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Why some make stock market forecasts

by Jan 25, 2023UpClose

Why some make stock market forecasts

by Jan 25, 2023UpClose

The investment industry devotes considerable time and resources to forecasting future market outcomes. But the accuracy of such forecasts is questionable at best.

Why are there entire businesses set up to make stock market forecasts? The answer is quite simple: forecasting exists because there is a giant market for it. Investors/traders thirst for forecasts. Here is the real question: Why do investors want to hear/read forecasts?

“Those who have knowledge don’t predict. Those who predict don’t have knowledge.”

—Lao Tzu

So that there can be no confusion, I want to state my honest heartfelt opinion on forecasting: I adamantly believe there is no one that knows what the stock market will do tomorrow, next week, next month, next year, or at any time in the future—period.

Hindsight is a wonderful tool to use to know why something might have occurred in the past, but rarely do you know the cause during the event itself. The prediction business is gigantic. William Sherden, in “The Fortune Sellers,” claimed that in 1998 the prediction business accounted for $200 billion worth of mostly erroneous predictions. Can you imagine with the growth of the internet and globalization what that industry is today? Frightening! As Oaktree Capital Management’s Howard Marks says, “You cannot predict, but you can prepare.”

Sherden states that the title “second-oldest profession” usually goes to lawyers and consultants, but prognosticators are the rightful owners. Early records from 5,000 years ago show that forecasting was practiced in the ancient world in the form of divination, the art of telling the future by seeing patterns and clues in everything from animal entrails to celestial patterns.

Isaac Asimov wrote in “Futuredays,” such was the eagerness of people to believe these augurs, that they had great power and could usually count on being well supported by a grateful, or fearful, public. I’m not so sure most of this isn’t applicable today. Sherden did much research into the numbers of people directly involved in forecasting, and this data was from 1998. They are staggering and growing. And let’s not forget that one of the largest-selling newspapers in the country is the National Enquirer.

Below are some of the findings on forecasting from Sherden’s book:

  • No better than guessing.
  • No long-term accuracy.
  • Cannot predict turning points.
  • No leading forecasters.
  • No forecaster was better with specific statistics.
  • No one ideology was better.
  • Consensus forecasts do not improve accuracy.
  • Psychological bias distorts forecasters.
  • Increased sophistication does not improve accuracy.
  • No improvement over the years.

A weather forecaster will have an exceptional record if he says that tomorrow will be just like today. If I were a weather forecaster, I would tend to err on the side of bad weather instead of good weather. Then if you’re wrong, most won’t notice. It’s when you forecast good weather and it isn’t, then they will notice. Most market prognosticators tend to have a bullish or bearish bias in their forecasts. Bullish forecasts are generally well accepted, especially by the Wall Street community, and bearish forecasting is a giant business because it infringes on investors’ fears.

“Given the difficulties forecasting the future, it is very useful to simply know the present.”

—Unknown

Barry Ritholtz (The Big Picture blog) pointed out how ridiculous the forecasting business has become—in particular, the end-of-the-year forecasts for the next year or the best stocks to own. In his blog, Ritholtz includes an example from the Aug. 14, 2000, issue of Fortune magazine by David Rynecki on “10 Stocks to Last the Decade:”

August 14, 2000:

  1. Nokia (NOK: $54)
  2. Nortel Networks (NT: $77)
  3. Enron (ENE: $73)
  4. Oracle (ORCL: $74)
  5. Broadcom (BRCM: $237)
  6. Viacom (VIA: $69)
  7. Univision (UVN: $113)
  8. Charles Schwab (SCH: $36)
  9. Morgan Stanley Dean Witter (MWD: $89)
  10. Genentech (DNA: $150)

Closing prices December 19, 2012:

  1. Nokia (NOK: $4.22)
  2. Nortel Networks ($0)
  3. Enron ($0)
  4. Oracle (ORCL: $34.22)
  5. Broadcom (BRCM: $33.28)
  6. Viacom (VIA: $54.17)
  7. Univision ($?)
  8. Charles Schwab (SCH: $14.61)
  9. Morgan Stanley Dean Witter (MWD: $14.20)
  10. Genentech (Takeover at $95 share)

Ritholtz goes on to say, “The portfolio managed to lose 74.31%, with three bankruptcies, one bailout, and not a single winner in the bunch. Even the Roche Holdings takeover of Genentech was 37% below the suggested purchase price. Had you merely bought the SPDR S&P 500 ETF (SPY), you would have seen a gain of over 23%.”

I think most investors or traders want to read or hear forecasts to find one or more that support their hope about the market’s direction. If you are a true technical analyst with discipline and confidence, you don’t need to read or hear a forecast. However, that is a tall order and one most are not equipped to deal with. Of course, I’m not talking about StockCharts.com readers.

Remember, no one knows the future!

Editor’s note: This article, written by Greg Morris, was published at StockCharts.com on Dec.7, 2022. Many thanks to the author and StockCharts.com for permission to republish the article. Please see frequent commentaries by Mr. Morris on the blog Dancing with the Trend.

Please see Chapter 5 (“The Illusion of Forecasting”) of Mr. Morris’ book “Investing with the Trend” for further discussion of this article’s overall topic. (Please note that an update to Mr. Ritholz’s 2012 blog post said that revised calculations would be made due to a takeover of Univision and stock splits for Oracle and Broadcom.)

The opinions expressed in this article are those of the author and do not necessarily represent the views of Proactive Advisor Magazine. These opinions are presented for educational purposes only.

Greg Morris has been a technical market analyst for over 50 years. His experience includes analysis software development, website analysis and education, and money management. He has a long history of understanding market dynamics and portfolio management and has written four books: “Candlestick Charting Explained” (and its companion workbook), “The Complete Guide to Market Breadth Indicators,” and “Investing with the Trend.” He previously served as the chief technical analyst and chairman of the investment committee for Stadion Money Management and currently serves as a senior advisor to McElhenny Sheffield Capital Management (MSCM).

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