Forecasts are rubbish? What to do?

In Financial competency, Investments on 16/01/2011 at 8:29 am

It’s the time of yr when forecasts are a dime a dozen. What shld be our attitude towards them? Treat them to way many netizens treat MM Lee’s pearls of wisd0m?

Byron R. Wien, the veteran strategist who has been issuing market forecasts for decades … says the quick answer is this: Don’t take these forecasts too seriously, and don’t view them as the literal truth.

“Few people get forecasts right very often,” he says. “I certainly don’t. I don’t even attempt to make a literal forecast. I try to come up with some ideas that are provocative, and worth thinking about.”

Benjamin Graham, the late Columbia professor and path-breaking value investor, gave some thought to market forecasts. He didn’t dismiss them entirely, but he didn’t place much store in them, either. In his classic, “The Intelligent Investor,” first published in 1949, he acknowledged: “A great deal of brain power goes into this field, and undoubtedly some people can make money by being good stock market analysts.”Nonetheless, he thought it the height of foolishness for the average person to hang onto the words, or the numbers, of the average analyst. “It is absurd to think that the general public can ever make money out of market forecasts,” he said.

The problem is two-fold.

First, as the great analytical failure of 2008 reminds us, market forecasts are sometimes not only wrong, but also dangerously misleading. We don’t know the future and can’t know it until it’s no longer the future. Yet we all try, and some people make a very good living at it.

It’s hard enough to forecast the future of complex economies, which are based less and less on the production and sale of actual goods like automobiles. Instead, such economies are increasingly dominated by globally traded and barely measurable services like the writing of computer code and the creation of music and films, to say nothing of the trading of financial derivatives.

This problem is magnified many times when it comes to predicting the valuations of financial markets, which are linked to the real economy but are also dependent on even less tangible factors, like mass psychology — the ephemeral moods of fickle traders.

Second, even if a forecast is somehow right on the money, it’s not clear what an investor should do about information that is available to every other interested person on the planet. If a prediction says stocks will go up, and everyone believes it, the crowd is then likely to drive up prices very rapidly — until it is convinced that prices are too high and it begins to drive them back down.

What to do

Following these vagaries is no way to run a portfolio, says Aaron Gurwitz, the chief investment officer at Barclays Wealth. “I don’t think market forecasts provide very useful information,” he says.

Instead, he focuses on asset allocation and on expected returns, volatility and correlations of specific asset classes over long periods. “I would really like my friends and neighbors to stop asking me whether I think the market is going up or down,” he says. “Investment strategy is the practice of decision-making under uncertainty,” he says, and it’s not wise to act as though the future is anything but uncertain.

NYT article

  1. Hi Atans1, what’s your forecast on the current property prices with the new cooling measures? thanks

    • Fly baby fly. Juz wouldn’t fly so high.

      Can’t you understand what I’ve been trying to tell you. When the economy goes into recession, property flies. When economy does 5%, you expect property prices to collapse?

      And interest rates are so low, and credit is easily available and FTs still coming in.

      You screwed up. Live with the consequences. Stop hoping for mkt collapse.

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