Swedroe: Measuring Value In Forecasts

May 20, 2019

Their data set included 6,627 forecasts made by 68 forecasters. The following is a summary of their findings:

  • Just 48% of all forecasts were correct.
  • 66% of the forecasters had accuracy scores of less than 50%—worse than randomly expected.
  • 40% of forecasters had accuracy scores of 40-50%; 19% had scores of 30-40%; 4% had scores of 20-30%; and 3% had scores of 10-20%.
  • 18% of forecasters had scores of 50-60%; 10% had scores of 60-70%; and 6% had scores of 70-80%.

Among the notables with poor accuracy scores: Jeremy Grantham, 41%; Marc Faber, 39%; Jim Cramer, 37%; Abby Joseph Cohen and Gary Shilling, 34%; and Robert Prechter (famous for the Elliott Wave theory), 17% (the worst score). Among the notables with the best scores: David Dreman, 70%; Louis Navellier, 66%; Laszlo Birinyi, 64%; and Bob Doll, 60%. The best score was John Buckingham’s 79%.

The authors noted that their results were worse than those found by CXO—holding forecasters to stricter standards resulted in lower accuracy rates. They concluded that, while some forecasters did well, the majority performed at levels not significantly different from chance.

Summary

The bottom line is that the research shows that when it comes to predicting economic growth, interest rates, currencies or the stock market, the only value of investment gurus is to make weather forecasters look good. Keep this in mind the next time you find yourself paying attention to the latest guru’s forecast. You’re best served by ignoring it.

As I point out in Think, Act and Invest Like Warren Buffett, that’s exactly what Buffet himself does, and what he advises you to do: Ignore all forecasts, because they tell you nothing about the direction of the market, but a whole lot about the person doing the predicting.

Unfortunately, the financial media isn’t required to present the track record of forecasters they provide exposure to. The reason they don’t is that accountability would spoil the game, and you would stop tuning in. Jason Zweig put it this way: “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.

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 130 independent registered investment advisors throughout the country.

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