Swedroe: Wall St. Randomly Right Or Wrong

March 27, 2013

Editor’s note: Larry Swedroe is a new columnist for IndexUniverse.com.


Back on March 18, Bloomberg reported that two of the largest and most prestigious investment firms in the world, Goldman Sachs and Morgan Stanley, had raised their forecasts for the S&P 500 Index.

One could conclude that Bloomberg believes this is important information for investors to know, or they know it has no value but they pretend it does in their own self-interest. Selling news stories is how the company makes money.

To see if you should care about Goldman’s and Morgan Stanley’s reading of the tea leaves, we’ll go to our trusty videotape.

The S&P 500 closed 2010 at 1,257.64. Goldman’s forecast for 2011 was for a close of 1,450, while Morgan Stanley forecasted a close of 1,238. The S&P 500 closed the year virtually unchanged at 1,257.60. While Morgan Stanley gets an A+ for being off by just 20 points (or just 1.6 percent), Goldman gets an F for being off by 192 points (or by 15.3 percent).

Both firms were less optimistic for 2012 than they were for 2011. Morgan Stanley made a bearish forecast, with the S&P 500 closing at just 1,167, a drop of 7.2 percent. Goldman’s forecast was for a close of 1,250 (virtually unchanged).

Note that these were the two most bearish forecasts collected by Birinyi Associates. The S&P 500 ignored both their forecasts and closed the year at 1,426.19. Only two of the 13 Wall Street forecasts called for a higher close. Goldman’s forecast was off by 14.1 percent and Morgan Stanley missed by 18.2 percent. Since we don’t grade on a curve, this time, both get an F.

Investors who perhaps sold stocks based on either of these forecasts missed out on the 16 percent total return of the S&P 500 Index, 4.2 percent higher (and 35 percent relatively higher) than the index’s average annual return, and 6.2 percent higher (63 percent relatively higher) than its long-term compound return of 9.8 percent.

It’s important to understand that the sheer number of those participating in crystal-ball gazing means it’s a virtual certainty that some guru will make an incredibly accurate call. And that will result in he or she having their “15 minutes of fame” in the financial media.

But the evidence shows that there will be no more persistence in their forecasting accuracy than would be randomly expected. There are numerous examples that make this point, but perhaps the most famous and compelling is that of Elaine Garzarelli.

While working at Shearson Lehman, Garzarelli correctly forecast the 1987 crash. Shearson Lehman began to widely tout her ability to call market moves and rewarded her for her successful prognostications with a mutual fund of her own to manage. Let’s look at her record:

  • By June 30, 1994, the fund she was managing, the Smith Barney/Shearson Sector Analysis Fund, had risen in value by just 38 percent over the five years she was in charge, underperforming the Dow Jones industrial average by about 50 percent.
  • In May 1996, with the Dow surpassing 5,700, this well-known market guru, now running her own firm, advised her clients to invest aggressively. Almost immediately, the market underwent a sharp correction, falling more than 400 points.
  • She then reversed direction, advising her clients to sell. Once again, the market reversed course. By November, the DJIA had crossed 6,500.
  • In January 1997, with the market approaching 7,000, Ms. Garzarelli reversed position once again and advised her clients to buy. By April, the market had dropped to under 6,400.



As discussed in my new book “Think, Act and Invest Like Warren Buffett,” Warren Buffett ignores all market forecasts and advises investors to do the same—which begs the question, Why do so many investors worship at the idol of the Oracle of Omaha yet totally ignore his sage counsel?

Larry Swedroe is the director of research at BAM Alliance, the entity that encompasses the more than $18 billion in assets directly or indirectly linked to Buckingham Asset Management. He recently published his 13th—and he says final—book “Think, Act, and Invest Like Warren Buffett.”




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