More Than Just the Folly of Forecasting

"We have reached that time in the year where everyone is speculating about the prospects for equities in the year ahead.  As usual the consensus is that the market will be up 10% in 2014.  I have been an observer of strategists' estimates for half a century and I can tell you that as a group they always think the market will be up 10% in the following year whether stocks were up 20% or down 20% in the previous year."

- Byron Wien

There is something even more insidious here than just the folly of forecasting. The Mercenary Trader cuts to the chase in his breakdown of the mallady.

Think about the magnitude of what Byron Wien -- a guy who has been in markets longer than most traders have been alive -- is saying here. The collective Wall Street strategists who are bullish for the coming year are ALWAYS bullish. EVERY year. By an amount just enough to be respectable without getting them in trouble. So why should anyone care what they say or think? Their two cents isn't even worth two cents. It has negative value because it's a waste of time. They should be laughed out of town.

And why aren't consensus strategists laughed out of town? Why does the same crap get play year after year? Is there anything more irrational or lame than paying attention to utter bullshit, that has proven itself worthless, year in and year out, over and over again? Why do investors do it? Why do investors care about predictions that virtually never deviate from a standardized norm, and thus have almost zero information value?

A pet theory: It is in part because institutional investors are not the savvy, sharp group that biased product promoters and academic apologists would have us believe. To a large degree they are a group of underpaid (relative to the size of assets they manage) identikit MBAs in matching suits and ties, trying hard to avoid career risk while making decisions that don't get them fired. In the process of making those decisions, sticking close to the herd, or the established norm, is generally the safest thing -- and this "don't make waves" attitude is generally weak-minded, which leads to a weak-minded embrace of useless predictions as a pastime and a crutch. It's the same thing for establishment forecasters, by the way, which is why their predictions always cluster. The nail that sticks out gets hammered. Our general view is that, with a handful of notable and important exceptions, the supposedly high and mighty money management environs of Wall Street are actually closer to a bunch of drunks propping each other up via consensus embrace of mutually poor solutions and broadly irrational practices, not unlike the historically hidebound and sclerotic Japanese zaibatsu or Korean koretsu (big dumb corporate managements entrenching each other through cross-holdings of shares).

Bernstein on Forecasting

Bernstein wrote an editorial in the Spring 1996 Journal of Portfolio Management on forecasting that was a classic. Titled, "Fearless Forecasters, or Fearless Forecast Consumers."

After highlighting the ridiculousness of forecasting he drew the following conclusions:

(1) The question is not whether wildly wrong forecasts will happen, but what we do about the high probability that wildly wrong forecasts will happen.

(2) We should study expert forecasts as evidence of the state of expectations, but not as any kind of measure of what the future holds in store.

(3) We should concoct scenario forecasts because they force us to consider wide changes and even discontinuities.

(4) We should put more effort into managing risks and considering the consequences of being wrong.


He ends with, "pretending to believe that forecasts are going to be right may be the greatest risk of all."

Hold Fast...Then Fade The Fading Seasonals

I am inclined to hold through to some ambiguous point in the first or second quarter 2013. I think the momentum and the seasonals are going to work in that favor. But I suspect resolution to the Fiscal Cliff and a burst of levity due to new year optimism will be worth fading.

It seems to me that the accumulation of obliviousness (classic market action - climbing the wall of worry) will peak and give way at some point to the weight of cumulative fears.

2012 has been a good year for the market. I don't think 2013 will be as good.