1/ Successful Active Investors Generally Ignore Forecasts and Predictions.
“I have no use whatsoever for projections or forecasts. They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be.”
~Warren Buffett
“I have no use whatsoever for projections or forecasts. They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be.”
~Warren Buffett
2/ You can’t turn on business TV or read all of the various business news outlets or even talk with other investors without being bombarded with both short- and long-term forecasts and predictions. Against all the evidence, forecasts and predictions about what might happen in
3/ the future are intuitively attractive to us, since we are desperate to have a narrative about how the future might unfold. We tend to extrapolate what has happened recently well into the future, which almost never works. We’ll explore the results of this in a minute,
4/ but for now, consider that since we literally hear or read so many forecasts about markets, stocks, commodity prices, etc. that to follow up on the efficacy of each would be a full-time job. Lucky for us, others have done this job for us, and the results are grim.
5/ In a post at his website The Investor’s Field Guide, my son and OSAM CEO, @patrick_oshag, highlighted a study that showed: “The @CXOAdvisory gathered 6,582 (investment) predictions from 68 different investing gurus made between 1998 and 2012, and tracked the results of
6/ those predictions. There were some very well-known names in the sample, but the average guru accuracy was just 47%–worse than a coin toss. Of the 68 gurus, 42 had accuracy scores below 50%.” In his book "Contrarian Investment Strategies: The Psychological Edge," money manager
7/ and author David Dreman looked at the accuracy of analysts’ and economists’ earnings growth estimates for the S&P 500 between 1988 and 2006. Dreman found that the average annual percentage error was 81% for analysts and 53% for economists!
8/ In other words, you might as well have bet on a monkey flipping coins. People tend to take recent events and forecast similar returns into the future. Dreman nicely captures the results by looking at large international conferences of institutional investors where hundreds of
9/ delegates were polled about what stocks they thought would do well in the next year. Starting in 1968 and continuing through 1999, Dreman found that the stocks mentioned as favorites and expected to perform well tended to significantly underperform the market, and in
10/ many instances the stocks selected ended up in the stock market’s rogue’s gallery—for example, the top pick in 1999 was Enron, and we all know what happened there: one of the largest bankruptcies in corporate history. Least it seem like he was cherry-picking,
11/ Dreman looked at 52 surveys of how the favorite stocks of large numbers of professional investors fared between 1929 and 1980, with 18 studies including five or more stocks that experts picked as their favorites. The results? The 18 portfolios underperformed
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