Your Investments: Stock market prognosticators - Better to flip a coin

“I can’t predict the future, and I don’t have respect for people who try to”. – Jackie Mason

January 30, 2014 06:04
3 minute read.
BASTION OF CAPITALISM: The New York Stock Exchange

New York Stock Exchange R370. (photo credit: BRENDAN McDERMID / REUTERS)


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As I have written here numerous times, my mother of blessed memory was fond of the saying, “Prophecy was given to fools.” We have a hard enough time trying predict the weather next week, let alone the winner of the Piston Cup fictional car race between The King, Chip Hicks and Lightening McQueen ( thanks to my five-year-old son Yonatan for introducing me to the Cars movie).

Nonetheless, for some reason when January rolls around, “experts” in fields ranging from politics, sports, music and a host of other things are trotted out to make their forecast for the upcoming year. It goes without saying that plenty of experts also give their “professional” prediction of what will happen to the financial markets as well. In the words of John Kenneth Galbraith, “The only function of economic forecasting is to make astrology look respectable.”

If we actually go back and check expert predictions from a year ago, you will see how correct my mother was. David Weidner actually did some checking and came up with a list of the worst calls. Keep in mind that the S&P 500 Index rose just under 30 percent. According to Weidner: “Rogers advised investors to follow him into commodities and away from stocks in 2013. He explained that the Federal Reserve’s monetary policy of bond buying and low interest rates would cripple the economy and the US dollar. Rogers went as far to say 2013 would usher in a new recession and that it’s ‘only going to be worse’ than the two most recent pullbacks.

Oops. The average commodity exchange-traded fund lost over 15%.” Yikes that’s only a 45% difference!


It’s easy for me to sit back and cherry-pick bad market calls.

But new research is out showing that you would be better off flipping a coin to make a market prediction than listen to a talking head. CXO Advisory Group collected more than 6,500 forecasts for the US stock market offered publicly by 68 experts, bulls and bears, employing technical, fundamental and sentiment indicators. They did this over a seven-year period starting in 2005. What they found was astonishing: “Terminal accuracy is 46.9%, an aggregate value very steady since the end of 2006.” This means that only 47% of market predictions were accurate. Out of the 68 experts, only about 25 were successful at least 50% of the time. The top five were right in about two-thirds of their forecasts.

I often get calls from clients asking me what is going to happen to the market over the next two to three months. I generally answer that I have no idea, but that if you give me three to five YEARS, the market should be higher than its current level. The old cliché about not timing the market, but time in the market, is shown to be accurate time and time again.


No one can continually successfully predict market movements.

There used to be an old sales technique used by unscrupulous stock brokers. They would send out a stock prediction to 100 prospects, half to buy the stock and half to sell it. For the 50 prospects who were sent the correct prediction, they would do the same thing, and then do it again to the 25 with the correct recommendations. At the end of the day there were 12 prospects who were correctly sent a recommendation three times in a row. The broker would then call them and brag about how great his forecasts are and that it would be smart to open an account with him.

Be wise

The best way to build your wealth is by correctly allocating your portfolio and rebalancing it from time to time. Leave market prophecy to the fools.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates. Aaron Katsman is a licensed financial professional in Israel and the United States who helps people with US investment accounts. He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.

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