Investors have been faced with extremely volatile markets this year. As a result, investors have been looking for guidance — from news outlets like CNBC, and Wall Street strategists.
However, as 2008 has shown us, this may not be the best approach for investors to take…
The Problem With Wall Street’s Predictions
For years, BusinessWeek magazine’s last issue of the year contained a feature in which leading Market forecasters gave their predictions for the coming year.
Here are their predictions for the S&P 500 for 2008, published on the very last day of 2007. In other words, these predictions were for the year that began the very next day, so it’s not exactly a group of long-range predictions.
In spite of that – of these 13 well-known, high-profile and highly-paid forecasters – 11 predicted a positive 2008, and some even a great 2008!
One predicted a slightly-down 2008, and the most-negative prediction suggested just a modest decline, only 8%!
The average prediction was for almost a 10% gain. The actual result of the S&P 500 index was -38.5%, so to say they were a bit off-the-mark is an understatement!
Yet investors by the millions continue to hang on every word uttered by this elite group.
Predictions, Opinions, Outlooks and Forecasts are embedded in practically every segment that’s broadcast on the financial-news channels such as CNBC.
Guests on CNBC are knowledgeable, well-spoken, completely rational … and frequently wrong.
Here is a sampling of what was said in 2008, when investors needed good guidance the most:
Even many CEOs – who should know more than anyone about the prospects for their own companies – were tragically wrong .
Supposedly-objective analysts like Larry Kudlow, in the upper right, and the Financial Times guy in the lower left, were terribly wrong.
The Wall Street Journal Study
Are the predictions of Market experts and forecasters usually right? Or are we picking on them by displaying a handful of rare and unusual misfires?
Not according to a study reported on by the Wall Street Journal in October of 2010.
Professor Phillip Tetlock, of the University of Pennsylvania, studied 20 years of predictions from 284 experts in the fields of politics and finance (which, of course, includes the Stock Market), and carefully catalogued the outcomes of a staggering 82,361 predictions.
He concluded that experts are more often wrong than right, … and would have done better flipping a coin!
He further found that the more degrees experts have, the more likely their predictions are to be wrong – and even worse, to stay wrong – evidently because they think so much of their own opinions, that they refuse to change them, even in the face of facts to the contrary!
So, sadly, misfires in predicting – even from highly-paid experts – seem to be the rule, not the exception.
Featured image: Flickr/Anthony Wong