photo by Philli Casablanca

As seen on Utah CEO Magazine’s Blog
Written by Dave Young, President of Paragon

Forecasts make interesting conversation and trivia. Just don’t use them to try to make money.

There’s no shortage of self-proclaimed market prophets. You can find them in the investment magazines, newspapers or on CNBC. The problem is that when investors listen to their forecasts, many believe them because they are broadcasting using national media, which is credible, right? No!

After 22 years of managing money for clients in the stock market, I have found that market forecasts continue to be false over and over. I’d like to give you three reasons why you shouldn’t listen to them:

1. Although market forecasters can be entertaining, they provide no real investment value. Market forecasters do not help anyone make money. In fact, investors who follow them are more likely to lose money than to gain it.
2. The market guru, seer, pundit or executive continually makes forecasts in an attempt to gain public attention. The way the forecasting game works is that the market guru, seer, pundit or executive continually makes forecasts in an attempt to gain public attention. By sheer luck, maybe half of these predictions are proven right — meaning that at least half of them are wrong. On the occasions when the forecast turns out to be correct, the forecaster plays it up. Those many forecasts that don’t pan out (and those many investors who are financially hurt by them) are never spoken of again.
3. You’re much more likely to get an accurate prediction of the future by listening to the weather forecasters. At least the weather forecasters inflict less damage when they’re wrong.

Ned Davis Research and InvestTech Findings

Ned Davis Research and InvestTech collaborated to analyze the forecasts of some of the most highly paid and highly regarded market forecasters in the financial industry. This is a small sampling of the findings.

In the January 14, 2008, edition of By the Numbers from Direxion Funds, they published a report showing how the forecasters did last year. The year 2007 appears to be a different year, but the same story. One thing the forecasters can claim is consistency because they are consistently WRONG!

• The average prediction made on January 1, 2007, by 58 Wall Street forecasters for the yield on the 10-year Treasury note as of year-end 2007 was 4.88%, an increase of +0.17% over its 4.17% level from December 31, 2006. Instead, the actual December 31, 2007 yield did not rise from a year earlier, but fell to 4.02% (source:  BusinessWeek).
• 82% of money managers believed in late December 2006 that long-term interest rates in the US would be “unchanged or higher 12 months later.” The yield on the 30-year Treasury bond was not “flat to higher” but rather declined from 4.81% to 4.45% during calendar year 2007 (source:  Merrill Lynch).
• 56 economists who were surveyed in mid-January 2007 predicted that the average price of oil would be $58 a barrel in the 4th quarter 2007, down $3 a barrel from its $61.05 price of December 31, 2006. However, the price of oil did not fall, but rather rose +57% during 2007, closing last year at $95.98 a barrel (source:  USA Today).
• The S&P 500 was up +9.2% YTD (total return) through Friday, July 20, 2007, closing at 1534. The headline in Barron’s over that weekend stated, “It’s Still Time to Buy” forecasting an additional +6% rise to 1625 by December 31, 2007. Instead, the stock index fell 4.3% to finish 2007 at 1468. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market (source:  Barron’s).

Also, from a long-term historical perspective, here is some more interesting “market forecast” trivia. This is also courtesy of Direxion’s By the Numbers publication:

• On the morning of October 19, 1987 — the trading day that ultimately resulted in the largest one-day percentage loss in the history of the S&P 500 — the Wall Street Journal ran a front-page article with the subtitle “Some Stay Bullish, Believing Downturn is Temporary.” The S&P 500 fell 20.5% that day (source:  Wall Street Journal).
• On August 13, 1979, BusinessWeek ran a cover story titled “The Death of Equities.” The S&P 500 closed at 107 on August 13, 1979. The S&P 500 closed calendar year 2007 at 1468. Apparently, equities didn’t die…(source: BusinessWeek).
• At the close of business on Wednesday, October 9, 2002, the S&P 500 bottomed at 777 before beginning a bull market run that gained +101% to peak at 1565 on October 9, 2007, exactly five years to the day after the bear market bottom. The headline in the business section of USA Today on Thursday morning October 10, 2002 was “Where’s the Bottom, No End in Sight.” (source: USA Today).

These findings may seem shocking to someone encountering them for the first time, but they are far from atypical. This is just a small snapshot of how bad the market forecasting business really is. Yet despite mountains of data that show how ineffective the celebrity market forecasters are, they continue to make their predictions and many unfortunate people continue to base their financial decisions on shoddy, unproven advice.

So, if forecasts are a waste of time then what does work? After 22 years of managing money, I am convinced that investors will only succeed when they are able to remove emotion from the investment process. Gut feelings are not a reliable investment strategy — even the gut feelings of so-called experts.

Our clients at Paragon Wealth Management can be confident that their portfolio isn’t being managed by some celebrity market fortuneteller. Our quantitative models enable us to impartially measure what is actually happening in the market and how much risk there is at any point in time. We constantly evaluate the models to determine how effectively they are working. In my opinion, this is one of the best ways to invest for long-term success.

About the Author
Dave Young started his career as an entrepreneur after graduating from Brigham Young University in 1980. He successfully started 12 businesses and decided to sell them in 1986. He wanted to invest the proceeds, but was unable to find an investment company that met his needs. As a result, he started Paragon Wealth Management later that year. Today, he has cients throughout the United States.  

To learn more about Paragon Wealth Management call 801-375-2500 or visit www.paragonwealth.com.