A July forecast of "rain, hail, and snow" mistakenly appeared in The 1816 Old Farmer's Almanac. The Almanac’s owner, Robert B. Thomas, caught the mistake and printed new ones but not before word got out. Initially, Thomas was ridiculed until it actually snowed that July. Is it any wonder that the Almanac is still being produced today? Such is the power of one good prediction.
When it comes to weather, we've come a long way in our ability to predict what’s coming. In his 2012 book, “The Signal and the Noise”, blogger Nate Silver examined the world of predictions. Included in his analysis was a comparison of three different weather forecasters: The National Weather Service (NWS), The Weather Channel (TWC), and “Local TV Meteorologist”. What he found was that when the NWS said there was 100% chance of rain, it actually rained nearly 100% of the time. TWC came in second, with a success rate > 90%. For some reason, though, local meteorologists were only right approximately 70% of the time.
Why would the local yokels fare so much worse? My guess is eyeballs. TV folks need eyeballs, or ratings in other words. Have you ever noticed how giddy the weather guy or gal gets when there is a thunderstorm or snow in the forecast? It’s also interesting that they never break into commercial time to provide updates, it’s always during a show that you actually want to watch. It’s all about getting us to tune in at 10, so they embellish or hype a little to get us interested.
Stock market forecasters aren't really all that different. Some want you to buy their newspaper, others to watch them on TV, or maybe even to invest with their firm. Here were some actual headlines that I found on CNBC.com from the past week. These come from articles and interviews with a variety of money managers and media personalities, folks much like your local meteorologist, just trying to get your attention:
“Why global markets could keep crushing the US”
“US crude to drop to $40 as stocks rise”
“Steer clear: The gold selloff could get uglier”
“Expect 5-10% market correction”
“Perk up! Coffee headed higher”
“What bubble? NASDAQ uptrend to continue”
“Watch out for emerging ‘wreckage’”
BOOYAH! Ready to turn off the set?
OK, so we’ve shown that the guy on TV may not be the most reliable, but professional stock market forecasters have got to be better (like the National Weather Service) right? According to a recent article written by Morgan Housel for The Motley Fool, the 22 “chief market strategists” at Wall Street’s biggest firms fare nearly 15% worse than his “Blind Forecaster”. That’s Housel’s term for “a brainless idiot who assumes the market goes up 9% -- its long-term historic average -- every year, regardless of circumstances.”
So if the pros can’t get it right even as often as a brainless idiot, what can you do?
DIVERSIFY. Proper diversification doesn’t eliminate risks, but it takes away the guesswork and allows you to capture returns wherever they occur.
At least when it comes to the stock market, forecasting appears to have about as much value as guessing. However, if you get just ONE guess right, you may want to consider selling books!