Focus on Fundamentals Rather than “Expert” Forecasts

By John Reese (@guruinvestor) —  American philosopher and educator Nicholas Murray Butler once said, ” An expert is one who knows more and more about less and less until he knows absolutely everything about nothing.” His words, both wise and timeless, could apply to “expert” market forecasters. Butler (1862-1947) was president of both Columbia University and the Carnegie Endowment for International Peace, as well as a recipient of the Nobel Peace Prize–distinctions which would make… Read More

Ritholtz on Why We’re Bad at Forecasting

Forecasts are unproductive, writes Barry Ritholtz in a recent Bloomberg article, and we should not make investment decisions based on them. Ritholtz offers a list of reminders for readers of “what we know about forecasts and predictions, and why they are so rarely right.” Here are some highlights: We’re generally bad at it. “Examples are everywhere,” Ritholtz argues, citing how data provides clear evidence to support our failings at economic forecasts, expectations of future technologies,… Read More

Ritholtz on the Foibles of Forecasting

Barry Ritholtz, columnist and founder of Ritholtz Wealth Management, offers insights on the “problems and investing risks of forecasting” in a recent Bloomberg View. He explains that, because people dislike uncertainty so much, they tend to believe in predictions to create an “illusion of control and stability, where often there is none. Order is created out of chaos; it is a comforting illusion.” For investors, Ritholtz points out that “one of the biggest risks is… Read More

Beware of Rosy Stock Market Predictions

We’ve written before about the precarious nature of forecasts, and an article in last week’s Wall Street Journal sings the same tune—that investors shouldn’t get “carried away” with predictions that the market is headed for one of the best years ever. At the beginning of this year, it says, the average prediction was that the S&P 500 would “end at 2216, a figure hit—and passed—for the first time on Wednesday.” It argues, however, that “this… Read More

The Frailty of Market Predictions

The unexpected Brexit vote and Donald Trump’s presidential election victory both occurred despite overwhelming predictions to the contrary, writes John Reese in a recent article for The Globe and Mail. The CEO of Validea illustrates how forecasting in the world of investing is “equally fraught with unpredictable outcomes despite seemingly reasonable expectations.” Reese supports his argument with the research findings of psychology professor Philip Tetlock, who conducted a study of the predictive success of both… Read More

Siegel Says Stocks Will Higher

“If we get a good second half of the year earnings-wise, then I think the market could be up 10 to 15 percent” predicts well-known Wharton finance professor Jeremy Siegel in a recent interview on CNBC’s “Trading Nation.” According to CNBC’s account of the interview, Siegel says investor perceptions that the market is over-valued is based on weak earnings due in part to lower oil prices. However, he contends that earnings may be primed to… Read More

Tetlock On What Makes A Good Forecaster

How often are supposedly “expert” forecasters’ predictions right? A lot less often than you might think, according to researcher Philip Tetlock. But in a recent interview on Barry Ritholtz’s Masters in Business podcast, Tetlock says you can take steps to make yourself a better forecaster. Tetlock, a professor at the University of Pennsylvania and author of multiple books on the science of prediction, has found that as a group, supposedly expert forecasters don’t have much… Read More

How Current and Future Expectations Influence Stock Prices

Company performance and stock price performance, or outcomes, don’t always go hand and hand. In a very good article, Morgan Housel, economics and finance columnist for The Motley Fool, points out that predicting the future for stocks is harder than most people think. The performance of stocks are a function of future fundamentals (i.e. earnings and growth), but also “by performance within the context of expectations”. As Housel points out, one may actually predict future performance… Read More

Forecasts are more like “Aftercasts”

New research illustrates how strongly the recent past influences investor expectations, as Wall Street Journal columnist Jason Zweig notes. Research by Professors William Goetzman, Robert Shiller, and Dasol Kim concluded, in Zweig’s words, “that investors’ forecasts regularly look more like aftercasts – projections of the recent past into the future.” The research drew on data from Yale School of Management surveys conducted by Professor Shiller that have collected individual and professional investor forecasts since 1989.… Read More

4 Ways On How to Improve Forecasting Skills, a Credit Suisse Report by Mauboussin

In the aggregate, forecasters may be “roughly as accurate as a dart-throwing chimp,” but some forecasters are particularly and consistently far better than average. Credit Suisse reports that the book Superforecasting: The Art and Science of Prediction by Philip Tetlock and Dan Gardner provides important insights into how to improve forecasting skill, perhaps by as much as 60%.  In other words, there are measurable differences between run-of-the-mill forecasters and “superforecasters,” and these differences can be a guide to improving forecasting… Read More