No-Body

No one has successfully predicted stock-market results over the short term (any period less than a few years). No one. No investment legends from Omaha. No university endowments from Boston. No hedge funds from Greenwich. No prodigies, no sorcerers, no alchemists. No-body.

We have investigated. Lists of wealthiest Americans include no one magically inclined. Lists of top-performing funds show no one mystically gifted. Papers by idealistic academics and research by pragmatic practitioners find no one psychically skilled.

And yet, despite an absence of short-term fortunetellers, short-term forecasts remain prolific. In fact, we cannot find a single financial institution (of size) without a 2018 outlook on offer.

Morgan Stanley says global economies will “skate in sync”. RBC is feeling optimistic but vigilant. T. Rowe Price is simply optimistic. B of A Merrill knows we are toward the end of a bull market, but also knows such periods can provide great returns. Goldman predicts an impressively precise S&P 500 level of 2850. If you search on “stock market prediction 2018”, there are 8.56 million results.

All of these forecasts – all of them – lack evidence of predictive power. But they are also packed with elegant explanation. It is this combination – the futility of the forecasts and the intelligence of the forecasters – that makes one wonder why the forecasts persist.

A Freudian might argue that financial forecasters see in their mirrors market wizards. Most of them would, at least in private, acknowledge the difficulty of short-term market prediction. But (nearly) all of them still see themselves as especially skilled exceptions. After all, they are invariably well pedigreed: Well educated, well employed, well spoken. Some even write books, give speeches, appear on television. A presumption of special powers — by both investors and the forecasters themselves – seems reasonable.

A cynic might argue that financial firms wave their wands to enrich only themselves. Robert Proctor, Professor of the History of Science at Stanford, coined the term “agnogenesis” – the intentional cultivation of ignorance in order to sell a product. Proctor says that some industries and companies – think tobacco and Merck[1] – deliberately foster our confusion to enhance their profits. In the financial industry, the ever-complex, ever-changing clairvoyance of experts invokes much greed and more fear. In turn, billions in trading commissions and fees are generated. Suspicion is hardly unreasonable.

And investors are worried and overwhelmed. In the face of financial anxiety and complexity, the natural inclination is to swallow any plausible potion on offer. Our human brains demand order, and we attempt to satisfy this by relying on the experts.   

But when it comes to short-term market expertise, we find none. Any short-term advice, however mesmerizing, must be avoided, whatever the cause or motive.  It is difficult to acknowledge that the short term is random, but it is dangerous to deny reality.

J.K. Rowling says, in creating a fantasy world, the most important thing to decide is what your characters CAN’T do. In our perfectly un-fantastical world, short-term market results CAN’T be forecast, by anyone.

Instead, we advocate an unwavering focus on the long term. It doesn’t eliminate all worry or complication, and it doesn’t provide certainty. But while we find no evidence of market predictability in the short run, we see all sorts of evidence of solid predictability in the long run. And where one can find predictability, one can find investment success, and calm.

 

[1]Arenson, Karen. " What Organizations Don’t Want to Know Can Hurt." New York Times, August 22, 2006, Business Day