A New Kind of Investment Outlook

Outlook212015 Outlook2014-2015

Forecasting Follies

Nobody’s perfect.

That universal truth is easy to prove, of course, and no sane person would deny it. Indeed, even the smartest of us are far from immune even in our areas of expertise when we’re actively trying to do our best. A famous study by the U.S. Institute of Medicine concluded that up to 100,000 people die each year due to readily preventable medical errors. Since physicians are among the smartest and most highly trained professionals imaginable, being stupid is obviously not a prerequisite for making mistakes, even horrible mistakes.

It’s also easy to prove how error-prone we are in the investment world. Every year I take a look at various predictions for the year that’s ending and they are uniformly lousy in the aggregate. Moreover, when somebody does get one right or almost right, that performance quality is not repeated in subsequent years.

2014 provided more of the same in this regard. The median S&P 500 forecast among 50 top-end investment experts called for a year-end level of 1,950, up 6.44 percent on the year. As noted above, the actual closing level was 2,059, up 11.39 percent, essentially five full percentage points higher. That’s a miss of monumental proportions.

Last January, analysts called for far higher oil prices, firmer inflation, a worse jobless rate and higher interest rates. The exact opposite happened in each of those areas. The consensus crude oil price forecast was nearly $95 per barrel (up a bit) and 72 out of 72 economists were anticipating higher interest rates and lower bond prices. Advisor magazine reported that bond market sentiment was utterly bearish, leading pundits to recommend that investors limit their bond holdings to the shortest maturities in 2014. Meanwhile, 30-year U.S. Treasury bonds returned nearly 30 percent. Last April, Peter Schiff of EuroPacific Capital made the bold prediction that the “Federal Reserve’s quantitative-easing program will push gold to $5,000 an ounce.” The shiny yellow metal closed 2014 at just under $1,200, 80 percent or so lower than Schiff’s target.

Alleged experts miss on their forecasts and miss by a lot. Let’s stipulate that these alleged experts are highly educated, vastly experienced, and examine the vagaries of the markets pretty much all day, every day. But it remains a virtual certainty that they will be wrong often and often spectacularly wrong. On account of hindsight bias, we tend to see past events as having been predictable and perhaps inevitable. Accordingly, we think we can extrapolate from them into the future. But the sad fact is that we can’t buy past results. Continue reading