December 12, 2011
Big name pundits do it; mutual fund managers do it; economists and wannabe CNBC talking heads do it.
"It," of course, is peering in their crystal balls at the end of each year to come up with forecasts for the year ahead. The never-ending frenzy of financial market prognostication seems to reach fever pitch every December, as money managers know they will be judged on their ability to pick ideas that will perform best for clients in the coming months. Getting those calls right burnishes their credentials and helps them hang on to clients.
But let's not join in the frenzy.
The harsh truth, says CXO Advisory Group, is that most pundits get it right slightly less than half of the time. (CXO studied 5,000 predictions made by 60 individuals to come up with that result.) But even those who “get it right” aren’t necessarily doing right by their clients. That requires more than making predictions every December about what's going to happen next year to the dollar, the S&P 500 index, housing starts, or crude oil prices.
These things matter, of course, but it's not a matter of predicting them correctly, but deciding correctly how to respond to them when constructing a portfolio. And even if a pundit calls the headlines correctly, that's absolutely no guarantee that their crystal ball will provide detailed plans of what to do.
For instance, anyone familiar with Steve Jobs' battle with cancer might have dared to predict that some kind of new health scare on the part of the Apple CEO would wreak havoc on the market's confidence in Apple; it's unlikely that they would have gone out on a limb to predict that despite Jobs' death in October, Apple's stock price would end the year at nearly $400, up from $322 at the end of 2010.
Byron Wien, the Wall Street legend and vice chairman of Blackstone Advisory Partners, was correct in his annual list of "ten surprises," released in early January, that the price of gold would break through $1,600 an ounce. In fact, that price now seems to serve as a kind of technical floor. Does that mean that investors would have been right to load up on gold last January? Maybe not. That ride up has been so volatile that even veteran gold bugs among investment advisors now view it as too risky for their clients, except in very tiny amounts.
And then there are predictions that prove to be just flat-out wrong, at least over the course of a full calendar year, which in an investor's world is a significant expanse of time. Anyone who heeded Meredith Whitney's well-publicized warning to steer clear of municipal bonds would have missed out on one of the handful of top-performing assets in 2011. Just because Whitney made a remarkably prescient call about the U.S. investment banking landscape pre-crash doesn't mean she has acquired guru status. She may yet be proven right about the muni market, but being far too early is just as harmful to investors as being flat-out wrong.
Forecasts and predictions necessarily miss a lot, particularly when it comes to the broad geopolitical picture. No one outside the international affairs think tanks was talking much about Egypt, Yemen, Libya or Syria at the end of last year, except as perennial trouble spots; now political turmoil in the Middle East is rewriting the geopolitical map with consequences we can't yet determine.
At the end of 2009, no one predicted that a massive oil spill in the Gulf of Mexico would change the fundamentals for energy producers who rely on deep-water drilling for a growing amount of their output. Yet the BP spill shaped the debate over valuation and growth for the energy sector in 2010.
Going all the way back to 2003, bond pundits early that year were predicting that AMR, parent company of American Airlines, would file for bankruptcy protection and investors priced their bonds to reflect that, ascribing less value to them than to those issued by the regime of Saddam Hussein in Iraq. Within months, the Iraqi regime had fallen in the wake of the U.S.-led invasion; it took 8 1/2 years for AMR to file for bankruptcy.
Predicting the future of the global economy and global financial markets is a perilous business, but the one purpose it does serve (other than sheer entertainment value!) is to remind us of all the possibilities. So, rather than data-mining these forecasts in quest of actionable intelligence, perhaps the best way to respond is by reading them through to see if they raise new issues or point to concerns that we have overlooked.
Ultimately, what affects our portfolios most can be something as simple as failing to remember that six months ago, we swore we'd sell this or that stock when it had doubled, or that we'd start looking for bargains in housing stocks when new housing starts rose to an annual rate of 650,000 units.
True, it's fun every year for the pundits to look back and brag about what they got right (while drawing a veil over those predictions they bungled), or to point out what their rivals missed. But there's not much here of value for the rest of us.