T’is the time of year when the financial media outlets — both lay and professional — are chock-full of stories about what 2014 will bring.
Should you listen to them?
I’ll start off with a blanket response to that question of nyet, and soften it only if you promise to gird yourself against powerful forces for financial ill-health, head-faking you with promises of prescience, but ultimately amounting to nothing more substantively noteworthy than a two-year-old correctly calling heads three coin-flips out of five.
My reasoning here is two-fold, paralleling the two main parts of this piece that follow below. First, most predictors’ predictions are not even worth the electrons we use to store them because the types of predictions that predictors most often get right are predictions that most of us could get right on our own without any help from experts, and, second, when predictions are brought into the financial context, they are used primarily as sales tools, to get you to do something you might not otherwise do, because, hey, if this guy/gal purports to be able to predict the future, what else might s/he be able to do for you right here in the present?
To follow the thread of these two ideas, from predictors predicting badly to predictors generating revenue handsomely, please do read on, and I’ll do my best to provide you with some thoughts quite a bit more useful than useless.
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The first reason to ignore predictions about 2014 is that the people making those predictions are all pretty much just guessing.
Sure, some folks will get some of their predictions right. But everyone gets some of their heads-or-tails predictions right too! In fact, I would predict that, over the long-run, you’d get that coin-flip prediction right about half the time! And you are no coin-flippin’ (or cotton pickin’ for that matter) expert, are you?
Clearly, some predictions are easier to get right than others. For instance, there’s that prediction about whether the sun will rise tomorrow. That one’s downright easy to get right. And let’s hope it stays that way.
And how about a prediction that the U.S. economy will grow? That one is pretty easy too, because it’s rare for the U.S. economy to shrink (in its basic GDP dataset starting 1/1/1947, FRED serves up a total of 267 calendar quarters of data, during which GDP has fallen 40 times, or about 15% of the time). So if you predict that the economy will grow in the coming year, then, all things being equal (which they never are!), you’ll be correct about six times out of seven.
It’s a bit harder to predict which parts of the economy will grow faster than others, and which will actually shrink. Trends here, though, are often decades-long, so, in this realm, predictions about what the coming year will bring are not overly whistlin’-in-the-wind. For instance, we can predict, say, that 2014 will see decreased shipments of Windows-based computers and increased shipments of smart phones.
Go narrower still, and thing get much harder. Which smartphone maker will have the highest units-shipped percentage growth rate in 2014? Samsung? Apple? Those two seem like the obvious candidates. But which one do you predict will shine most brightly? (Personally, I’d go with Samsung because it’s extending its reach big-time while Apple’s 5C — the less costly version of its main iPhone, the 5s — is not much of an extension at all.)
And then there’s the ultimate hard-prediction: something along the lines of, what will be the biggest financial surprise of 2014? If you can make that prediction correctly even two out of five times, then I really, really want to pay attention to your predictions. But I just bet’ch’ya you can’t.
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Now let’s bring this back to the standard context in which most financial predicting this time of year occurs: the stock market.
How hard is it to accurately predict whether a share of Apple stock or Google stock or Netflix stock or Tesla stock or Facebook stock or Twitter stock (or any other highlflying stock) will be higher or lower one year from now? That’s a really hard prediction to get right, isn’t it? In fact, I’d pretty much call that sort of call a simple case of hit-or-miss — more a guess than a prediction.
Remember: the price of a share of stock isn’t necessarily about what that little itty-bitty slice of the company is objectively worth (whatever that might mean) but, rather, it’s necessarily, completely and exhaustively about what everyone else in the world who is buying and selling shares of that stock subjectively thinks it’s worth, with sellers doing their best to push the price higher and buyers doing their best to push the price lower, and with Wall Street folks, in classic heads-I-win/tails-I-win fashion, doing their best — and nearly always succeeding — at making too much money, regardless of the pricing outcome for others of all those pushes and pulls.
When it comes to the stocks mentioned above, then, we’re talking about the thoughts and decisions of thousands of people at any given moment during which the shares of that company’s stock is trading. It’s the wisdom of the jury and the hideousness of mobs all rolled into one, with bedevilling and confusing mega-doses of greed and fear thrown on top of the mix. Which combo of all those elements do you think will rise ‘n shine the brightest at any given moment? If you know the answer to that question, then you now the direction in which the price will move.
With that in mind, ask yourself this: do you think you can predict that direction with some accuracy over and above chance? Hmm? Do ya?
I think that, if you are anything other below near-genius in just the right ways, then you for-sure cannot.
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So the more specific and the less long-term-trend’y the thing being predicted, the more likely it is that the predictor is selling you some real sweet snake oil.
GDP will be up this year? Piece of cake.
Apple’s iPhone business will stall out this year relative to Samsung’s Galaxy et alia business? That’s a much harder call.
Where will Twitter’s stock price be on 1/14/15? I’d call that a 100% guess — and one that countless people are placing bets on right this very moment.
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People Making Financial Predictions are Mostly in Sales-Mode.
The second reason to ignore most predictors’ predictions is that most of the predictors want to sell you something other than their predictions.
When it comes to predictions in the financial media of the lay (also known as retail) variety, predictions are in large part about the Hollywoodification — the entertainmentification if you will — of the financial media for the financial masses. Jim Cramer, for instance, has a tremendous talent for speaking in paragraphs and for modulating the tenor and pitch of his voice, much like any good TV or radio personality, which means that many, many folks find his show mesmerizing and just plain ol’ fun to watch (though far fewer of them are doing so recently). What does it matter, then, that his predictions appear, by some measurements, to be about as accurate as a flip of the coin?
My advice, then, is that you enjoy Cramer, if you must, for his entertainment value, but do not drink the Kool-Aid all the way and actually buy and sell stocks based solely on what he says — or, worse, buy and sell stocks based solely on what he says on the few shows of his which you catch every once in a long while.
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When it comes to the financial media of the professional a/k/a wholesale variety, predicting is also in large part about . . . you guessed it . . . selling.
Money manager of every ilk out there would love to have a guru who foresees the future in 20/20 (or in 2020 for that matter . . . ) because every money manager of every ilk has gone through the school of hard knocks and has learned, often brutally and violently, how very hard it is to be consistently right in this regard. So they keep hoping to find someone who knows the answers. Or they keep believing that they themselves will be able to divine truth from non-truth among all the predictors’ predictions coming their way, all the better to be able to sell their money-managing wares to the prospects awaiting them.
The predictors, too, are selling because, by going out there and parading their predictions for many to see, the predictors foster their very valuable pundit-cred, which can lead to ever-more cash-flow’y speaking engagements. Which is great, since getting paid to speak to large audiences is in many ways an easier gig than getting paid to manage other people’s money because the speakers never much get held to account for their predictions. In many ways, then, this parallels the phenomenon of late-night infomercial real estate get-rich-quick schemers making their money not by the doing of the thing about which they speak, but by purportedly helping others to do that thing (a thing which the helper knows the helpees will pursue mostly to no avail).
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So, if listen to predictions you must, then, please, enjoy the show, but watch your wallet, and then do enjoy the show a bit more.
And, above all, please do take all the predictions your hear with a beach-worth of grains of sand/salt (to mix metaphors).
Be especially wary when it comes to predictions about the stock market and investing in general. Better yet, please think about investing in a way in which predictions have, literally, next-to-zero utility because your investment success is not based on you or anyone else guessing/predicting which investments will do well and which will not.
This is what passive investing approaches — investing approaches which use index-based investments — are all about. You can read about passive investing all over the web, and you can read about it in The John Friedman Financial Blog as well (here and here, to link to just a few pieces touching on this topic).