Swedroe: Checking In With The ‘Gurudex’

October 19, 2016

One of my favorite sayings about the market forecasts of so-called experts is from Jason Zweig, financial columnist for The Wall Street Journal: “Whenever some analyst seems to know what he's talking about, remember that pigs will fly before he'll ever release a full list of his past forecasts, including the bloopers.”

You will almost never read or hear a review of how the latest forecast from some market “guru” actually worked out. The reason is that accountability would ruin the game—you would cease to “tune in.” But I believe forecasters should be held accountable. Thus, a favorite pastime of mine is keeping a collection of economic and market forecasts made by media-anointed gurus and then checking back periodically to see if they came to pass. This practice has taught me that there are no expert economic and market forecasters.

Thanks to research compiled by the team at InterTrader, we can examine the 2015 stock market recommendations from 16 leading investment banking firms. They produced what they called the Gurudex.

How The Gurudex Works
InterTrader’s prediction data was sourced from The Motley Fool website for the period from Jan. 1, 2015 through Dec. 31, 2015. They collected the date of the prediction, the starting and ending prices, and the prediction itself (buy or sell). Because almost all the predictions did not specify a “time frame” for the investment, they provided results for 30-, 90- and 180-day investment periods, though all positions were closed out at the end of the year.

A guru’s prediction was deemed accurate if the sell price was higher than the buy price for the selected investment period—a very low bar. When reviewing the results, keep in mind that they do not account for transaction costs. The following is a summary of their findings:

  • For the 30-day investment period, 55 percent of the recommendations produced a gain. The total return of all the forecasts was just 0.8 percent, less even than the return one could have earned using an FDIC-insured deposit account from an online bank. It’s also less than the 1.3 percent return of Vanguard’s 500 Index Fund (VFINX), which does include all costs. Nine of the 16 investment banking firms posted accuracy percentages above the 50 percent mark, and six came in below. The highest accuracy rate was 74 percent for Barclays. However, the total gain of the firm’s predictions, before trading costs, was just 2.5 percent. The lowest accuracy rate was 33 percent for Mizuho. And that firm’s total return was an ugly -11.2 percent.
  • For the 90-day investment period, 49 percent of the recommendations produced a gain, with the aggregate average loss being 1.5 percent. Now, just seven of the 16 firms had an accuracy rate above 50 percent, and seven had an accuracy rate below 50 percent. Nomura posted the highest accuracy rate with 70 percent. However, the total return of the firm’s predictions, even before expenses, was -2.3 percent. Citicorp now had the worst accuracy rate at 14 percent. Its total return was -14.1 percent.
  • For the 180-day investment period, just 42 percent of the recommendations produced a gain, with the aggregate average loss being 3.7 percent. Only three of the 16 firms had an accuracy rate greater than 50 percent, while 10 of them had an accuracy rate below 50 percent. BMO Capital Markets had the highest accuracy rate at 58 percent, but its predictions produced a total gain, before expenses, of just 0.8 percent. Amazingly, Canaccord Genuity put up a 0 percent accuracy rate. I don’t think you could get a score of zero if you actually tried to do that. Its predictions produced a total return of -12.9 percent.
  • Using the end of the year, 43 percent of the recommendations produced a gain, with the aggregate average loss being 4.8 percent, pre expenses. Just four firms had accuracy rates above 50 percent, while 10 had rates below that figure. Nomura’s 60 percent accuracy rate was the highest, although its total gain, before expenses, was just 2.8 percent. Citicorp’s 14 percent accuracy rate was the lowest, and its recommendations earned a total return of -3.1 percent.

Conclusion

The preceding data serves as a reminder of the wisdom in Warren Buffett’s words of advice on the subject of the value of stock market forecasters: “We have long felt that the only value of stock forecasters is to make fortune-tellers look good. Even now, Charlie (Munger) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.

 

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