There Is Only One Person Who Knows Where the Market Is Going

Recently, I gave a seminar entitled “The Winning Investment Strategy.” The talk focused on assembling a globally diversified portfolio of passively managed funds (such as index funds and ETFs) tailored to an individual’s ability, willingness and need to take market risk.

I also discussed the importance of integrating a well-constructed investment plan into a comprehensive estate, tax and risk management (insurance of all types) plan. And finally, I discussed the need for maintaining the discipline required to ignore all market and economic forecasts made in the financial media and by Wall Street, because all-to-often they lead investors to abandon their long-term plans.

Ignore All Forecasts

The reason why investors should ignore all market and economic forecasts is simple. The peer-reviewed academic literature has concluded that there are no good economic and market forecasters.

For those interested in this subject, I highly recommend the books “Expert Political Judgment” by Philip Tetlock and “The Fortune Sellers” by William Sherden. In support of the academic findings on forecasts, I provided several quotations such as these:

• William Sherden: “Despite recent innovations in information technology and decades of academic research, successful stock market prediction has remained an elusive goal…Overall, we have not made progress in predicting the stock market, but this has not stopped the investment business from continuing the quest, and making $100 billion annually doing so.”
• John Kenneth Galbraith: “We have two classes of forecasters: Those who don’t know — and those who don’t know they don’t know.”
• Michael Evans, founder of Chase Econometrics: “The problem with macro [economic] forecasting is that no one can do it.”
• Steve Forbes, quoting his grandfather, who founded Forbes magazine: “You make more money selling the advice than following it.”
• Benjamin Graham: “If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen to the stock market.”

I also added that I had personally heard Warren Buffett state that he had not even looked at a macroeconomic forecast in at least 25 years.

Despite my lengthy comments, the first question I received went something like this: “What do you think is going to happen to the economy over the next few months.” I responded: “I’m happy to give you my opinion, but why would you care? I just explained that there are no good economic forecasters and the right strategy is to ignore all of them and stick to your well-developed plan.”

I continued: “I have served as an economist, run trading rooms for major financial institutions and provided forecasts to major corporations. When I got the forecast right, I would congratulate myself on how smart I was. But when the forecast turned out wrong, I would blame it on bad luck, meaning something unexpected happened. If you keep doing that, at the end of the day you are a genius. I learned that it was always luck, sometimes good and sometimes bad.”

Another lesson I learned was that, even though I might have a strong opinion on where the economy or the market is likely headed, I’m best served by ignoring that opinion.

I have also learned this important lesson. No matter how much we would like to believe otherwise, there’s only one person who knows where the economy and the market are headed — and if I ask him, at least in this lifetime, I won’t get an answer. And in the next one, it won’t matter anyway.

Advice from Buffett

Finally, Warren Buffett offered the following advice in his 2013 annual letter to shareholders: “Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important.”

And, in conclusion, he also offered this: “We have long felt that the only value of stock forecasters is to make fortune-tellers look good. Even now, Charlie (Munger) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”