A recent article in the Wall Street Journal discussed how bad forecasting typically is. The quote that resonated with me was:
Sometimes forecasting isn’t even about the future, some researchers say. The true goals of some predictions, says Kesten Green, a forecasting researcher at Monash University in Melbourne, Australia, include lighting a fire under the sales force or alarming the public into some sort of action.
That is true in the public policy arena when someone has an axe to grind. In the financial markets, it seems like the forecast are often designed just to get attention. If the goal is “hey, look at me” it’s understandable why some of the forecasts are so extreme. The more in tune with public sentiment and the crazier the forecast the more attention it gets.
With public confidence in the financial markets very low, no one wants to hear about a Dow 36,000 forecast, but a Dow 6,000 forecast will have lots of eager listeners. Is that really forecasting or just trying to sell a latest book, newsletter or money management system?
One can always make a case for whatever they want, if they selectively choose data and interpret it liberally. While it is sometimes interesting to contemplate what might happen, no one really knows. Worrying about what might happen often keeps investors from acting in the here and now and ends up hurting them in the long run.
The market is so incredibly complex that it is not possible to make consistently accurate forecasts. As a result, we rely on an adaptive process based on academically based information that modifies portfolio holdings as conditions evolve. That way portfolios are based on what is actually happening, as opposed to what may or may not happen in the future.
Remember: Opinions are like noses, everyone has one!