Why stock market forecasters are in need of a reality check
Financial Post - by Tom Bradley
You are doing your clients a disservice when you forecast what the stock market is going to do
This is an intervention. It’s for investment advisors and economists who have been exhibiting compulsive, addictive and destructive behaviours.
I think there are certain phrases I’m supposed to use for an intervention (I love you; I will be here for you; Thank you for all you’ve done for me) but I’ll get right to it.
You are doing your clients a disservice and embarrassing yourself when you forecast what the stock market is going to do over the next month, year or even few years. You are implying that you know what’s going to happen when in reality you have no clue. You may even be designing clients’ strategies on these baseless predictions. And if nothing else, you’re wasting valuable time and energy that could be used to find good companies to invest in or to provide advice to your clients.
I’ll make my case using things you know to be true.
There are a multitude of factors that drive stock prices. Some are in plain view and many more are hidden in the shadows. Some appear urgent but are unimportant, while the important ones are often ignored. For instance, elections in Ottawa and Washington have little impact on long-term returns while the growing middle class in Asia is a key economic force.
And these factors interact in unpredictable ways, with each event leading to other possible events (every action causes a reaction).
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If you still don’t accept what you’re doing is futile, please listen to what some highly successful investment professionals have to say.
Doug Macdonald was a pioneer of advice-only financial planning in Canada. I’ll never forget what he once said to me: “It became much easier to do our job once we realized that nobody, including us, knows what is going to happen in the future.”
No doubt you’ve heard of John Kenneth Galbraith. He put it another way: “We have two classes of forecaster: Those who don’t know and those who don’t know they don’t know.”
And I challenge you to find an annual market forecast anywhere in Warren Buffett’s writing. Indeed, he once said, “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
If none of this is getting through to you, please look at the numbers. From my experience, most market forecasts are in the range of six to nine per cent. In the last 60 years, the Canadian stock market has had an annual return in that range exactly five times. Yes, five out of 60. Meanwhile, it’s been in negative territory 16 times and up over 20 per cent on 18 occasions.
So, I implore you (and your firm) to stop making useless market predictions. I know it will be difficult. If you’re struggling with withdrawal, remember: I’m here for you.