market forecasting

Why You Shouldn’t Believe in Market Forecasting

Marcelo Taboada

Associate

From the Winner of a Forecasting Competition:

Why You Shouldn’t Believe in Market Forecasting

Every new year brings along a flood of predictions and forecasts for what the markets and economies of the coming year will hold. 2019 has been no exception as “experts” across the board share their views on what to expect from market indices, sectors, currencies, specific stocks, and even cryptocurrencies.

I’ve never shied away from criticizing forecasters in the past, and that makes my winning a forecasting competition even more ironic. Here’s how I came to receive this dubious honour.In June of 2017, I attended the CFA Forecasting Dinner. This annual event is attended by hundreds of investment professionals and executives. It features a panel with five or six industry “experts” who discuss the goings-on in the markets and predict what they believe is going to happen in the future. On some issues the panelists will be in agreement, on others they’ll be at loggerheads. The true spirit of the evening is to catch up with colleagues, share some stories, and have a great time over dinner and drinks. It’s a fun time as long as you mentally file the panelists’ predictions under after-dinner entertainment. The dinner also honours the person who made the most correct predictions in the previous year before collecting new predictions for the upcoming year. I entered my own set of predictions and one year later I was being honoured as the winner of the forecasting competition. Who would have seen that coming?

How did I beat the market forecasters at their own game? To be honest, I did try to make the most of the information I had at my disposal, but most of my “predictions” were nothing more than blind guesswork. At the end of the day, my guesses were better than everyone else’s. That’s not due to any smarts or skills on my part, but to good old-fashioned dumb luck.

The CXO Advisory Group tracks and grades the predictionsof so-called stock market gurus. The highest scoring guru has an accuracy rating of 68.2%, while the lowest has an accuracy rating of 20.2%. You would be better off flipping a coin. The lesson to take away from this is that short-term markets movements are random, and no one can claim to know how they’ll move with any degree of certainty. I may have won the coveted CFA one-year forecasting competition, but there’s no way I could ever delude myself into thinking that I know more than the collective participants whose behavior helps shape the markets.

Forecasting is part of the noise that causes unnecessary stress. It can negatively impact your investment experience – but only if you listen to it.  Our duty to you as your guide is to help you tune out this noise. Discarding forecasts and predictions in favour of evidence-based principles is an empowering experience that will help every investor succeed.

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