The Problem With Prognostication: Why You Shouldn’t Invest Based on “Expert” Predictions

I find predictions, and the people who make them, fascinating for a few reasons. First, I — like everyone — would love to get a hint of what’s coming up.

But successful forecasting is pretty difficult. Which brings us to the second reason why I like predictions: It’s entertaining to see how different the world turned out from how people expected. Here are several memorable predictions of yore:

  • “Radio has no future. Heavier-than-air flying machines are impossible. X-rays will prove to be a hoax.” William Thomson, Lord Kelvin, British scientist, 1899
  • “Television won’t last because people will soon get tired of staring at a plywood box every night.” Darryl Zanuck of 20th Century Fox, 1946
  • “They couldn’t hit an elephant at that distance.” Final words of Union General John Sedgwick, 1864
  • “Atomic energy might be as good as our present-day explosives, but it is unlikely to produce anything very much more dangerous.” Winston Churchill, 1939
  • “Who the hell wants to hear actors talk?” H. M. Warner, Warner Brothers, 1927
  • “It will be years — not in my time — before a woman will become Prime Minister.” Margaret Thatcher, 1969
  • “We don’t like their sound, and guitar music is on the way out.” Decca Records, when rejecting the Beatles in 1962
  • “The abdomen, the chest, and the brain will forever be shut from the intrusion of the wise and humane surgeon.” British surgeon Sir John Eric Ericksen, 1873
  • “I think there is a world market for maybe five computers.” Thomas Watson, president of IBM, 1943
  • “This ‘telephone’ has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us.” Western Union internal memo, 1876
  • “I’m just glad it’ll be Clark Gable who’s falling on his face and not Gary Cooper.” Gary Cooper, on turning down the lead role in Gone With the Wind

Good stuff.

The blind leading the blind
But we don’t have to go back decades to find instances of people (some of them pretty smart) being wrong about the future. Let’s flip through the cyber-pages of the Dec. 20, 2007, issue of BusinessWeek, which featured one of those year-end, “where the Dow will be a year from now” types of articles.

So where did six Wall Street experts think the Dow would be at the end of 2008? Dumb roll, please…

  • William Greiner, UMB Financial: 14,400
  • Tobias Levkovich, Citigroup: 15,100
  • Bernie Schaeffer, Schaeffer’s Investment Research: 15,300
  • Leo Grohowski, BNY Mellon Wealth Management: 14,800
  • Thomas McManus, Banc of America Securities: 14,700
  • David Bianco, UBS Investment Research: 15,250

You may recall that the Dow was quite a bit lower than each of those predictions on Dec. 31, 2008 — approximately 40% lower, in fact, at 8,776.

Okay, so those people aren’t really dumb. In fact, they’re likely in possession of above-average intelligence, and work with teams of analysts who also have above-average brains. And they also likely have access to the most data, the fastest computers, and the best software.

And they still were very, very wrong.

Boy, it would be great if we could consistently predict which investments would be the winners and which would be the losers. But it’s very difficult; in the short term, it’s impossible.

Dr. Doom
Want more proof? By now, you likely have heard and seen Dr. Nouriel Roubini, the NYU professor known as “Dr. Doom” for his pessimistic outlook. He gained a lot of fame for predicting the housing crash and resultant deep recession. Good for him.

In December 2008, Fortune magazine asked Roubini for his predictions for 2009. Here’s what he wrote:

For the next 12 months I would stay away from risky assets. I would stay away from the stock market. I would stay away from commodities. I would stay away from credit, both high-yield and high-grade. I would stay in cash or cash-like instruments such as short-term or longer-term government bonds. It’s better to stay in things with low returns rather than to lose 50% of your wealth.

Well, you know how good that advice was. The assets that Roubini warned against posted huge double-digit returns in 2009. As for the investments he recommended, the Vanguard Short-Term Treasury Fund (VFISX) returned just 1.4%, and the Vanguard Long-Term Treasury Fund (VUSTX) lost 12.1%.

As Yogi Berra once said, “It’s tough to make predictions, especially about the future.”

On my CAPS blog, I occasionally summarize predictions I’ve run across from the previous week or two. I always break them up into two groups: Those who predict good things for the economy or stocks, and those predict ill. Invariably, the people I quote are all smart, thorough, well-educated people. And they look into their crystal balls and see vastly different things.

J.D.’s note: CAPS is the free Motley Fool website where you can try your hand at picking individual stocks, track your performance, compare your performance to other CAPS players, and see what investments the best CAPS players are picking. GRS first mentioned it about two years ago. I’m no longer one for picking stocks, but if you are, CAPS is worth checking out.


But isn’t picking stocks the same thing as making predictions? If the future is so hard to forecast, why even try?

Ay, there’s the rub. If you’re putting money in an IRA or 401(k), you have to choose which investments to buy with that money. And investing, by its nature, is a predictions game; you put your money into the things that you think will be worth more in the future than they are worth today.

So what to do?

The power of diversification
As I’ve written before, having a well-diversified portfolio is the way to go for most people, because there’s no crystal ball required. You own lots and lots of investments, so that something will do well in just about any scenario. You own domestic and international investments; large, mid, and small stocks; index and actively managed funds; and if you own fixed-income investments, then diversify across corporate bonds, Treasuries, and inflation-adjusted bonds.

If you’re investing in individual stocks, keep yourself honest by tracking your results. If, after all the time you spend researching and monitoring your stocks, you underperform the market, then perhaps you’d be better off in a mutual fund of some kind. Motley Fool CAPS is a great way to see if you have what it takes to be a stock-picker before you commit too much of your nest egg.

In summary, my fellow Americans (and the Canadians who are reading — darn you and your gold-winning hockey team! — though you put on a great Olympics), unless you put all your money under your mattress, you have to make some guesses about what the future will bring. But do so with great humility and honesty. And beware of any “expert” who is very confident about what will happen. Chances are, if you examine his record, you’ll find plenty of reasons he shouldn’t be so confident.

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