Swedroe: Measuring Value In Forecasts

May 20, 2019

There were many well-known forecasters among the “contestants.” I’ve highlighted five of the more famous, each of whom makes regular appearances on CNBC, along with their forecasting score.

  • Jeremy Grantham, chairman of GMO LLC, a global investment management firm: His score was 48%.
  • Dr. Mark Faber, publisher of The Gloom, Boom & Doom Report: His score was 47%.
  • Jim Cramer, CNBC superstar: His score was 47%.
  • Gary Shilling, Forbes columnist and founder of A. Gary Shilling & Co.: His score was just 38%.
  • Abby Joseph Cohen, former chief U.S. investment strategist at Goldman Sachs: Her score was just 35%.

Of course, a few gurus had good records. But only five of the 68 had scores above 60% (among them was David Dreman with a score of 64%), yet 12 had scores below 40%. It’s also important to keep in mind that strategies based on forecasts have no costs, but implementing them does.

Further Evidence

David Bailey, Jonathan Borwein, Amir Salehipour and Marcos Lopez de Prado followed up the CXO study with their own: “Do Financial Gurus Produce Reliable Forecasts?” To be consistent with the CXO study, their focus was also on forecasts made for the S&P 500 Index. While using the same database as CXO (so the sample period was the same, December 1998 through December 2012), their study differed from CXO’s in that they treated each individual forecast according to two factors: the time frame of the forecast, and its importance/specificity.

They explain: “A forecast referring to the next few weeks should be treated differently than the one referring to the next few months; in particular, long-term forecasts should be treated as more significant than the short-term forecasts. After all, in the short-term anything could happen, as a matter of randomness, but in the long term underlying trends, if any, tend to overcome short-term noise. For these reasons, we give more weight to longer-term forecasts, since they imply investing skill with greater confidence. In this regard our study contrasts to the study of CXO Advisory team, which treated every forecast as equally significant.” The weighting scheme they used was as follows: up to one month, 0.25; up to three months, 0.50; up to nine months, 0.75; beyond nine months (up to two to three years), 1.00. If the forecast did not include a time frame, they assigned a weight of 0.25.”

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