Swedroe: ‘Gurus’ Without A Clue

July 31, 2015

Ritholtz Reviews Faber
Fortunately, I’m not the only one who holds forecasters accountable. Barry Ritholtz is the founder and chief investment officer of Ritholtz Wealth Management. He also writes regularly for Bloomberg View and The Washington Post. It so happens that Ritholtz spent time researching Faber’s track record for a presentation at a Financial Planning Association conference in the summer of 2014.

Ritholtz found Faber had announced in September 2009 that “stocks have likely peaked.” In 2010, Faber predicted imminent hyperinflation, saying that its occurrence was not a matter of if, but of when.

In 2011, Faber stated that the bear market had begun. Later in the same year, he predicted the value of the dollar would fall to zero. In 2012, Faber predicted a 1987-style crash sometime during the year, and he repeated the prediction in 2013 and in 2014.

It appears that Faber’s crystal ball, like all crystal balls (including mine), is actually quite cloudy. Of course, you’d never know that when you hear Faber speak, because he always appears highly confident of his forecasts.

What’s important for investors to understand is that, if someone makes enough forecasts, they will eventually get some correct. After all, even a broken clock tells the right time twice a day. Because we have a negative market return in about 30 percent of years, if market “gurus” continually forecast negative returns, about 30 percent of the time they will be right.

One (Fairly) Safe Prediction

In his presentation, Ritholtz noted that while he doesn’t believe in forecasts, he was highly confident in making the following one: “I’m going to forecast that next year Faber is going to forecast an ’87-like crash. Eventually, he’ll be right again, and people will call him a genius.”

That’s the way the financial media works. They anoint gurus so you’ll feel the need to “tune in.” Unfortunately, as highly regarded Wall Street Journal columnist Jason Zweig explained: “Pigs will fly before you’ll ever see a full list of the expert’s past forecasts, including the bloopers.”

If investors knew the evidence on forecasting accuracy (for those interested, I recommend Philip Tetlock’s “Expert Political Judgment” and William Sherden’s “The Fortune Sellers”), they would learn to tune out all market forecasters.

Here’s the advice Warren Buffett offers on the subject: “A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting.”

He also has stated: “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.”


Find your next ETF

Reset All