Why You Should Stop Believing in Market Outlook

By Christian Schnettelker @http://www.flickr.com/photos/96913861@N04/9483602817

22 Feb Why You Should Stop Believing in Market Outlook

CXO Advisory did a very bold and lengthy study on prediction accuracy in the financial markets.

They collected 6,582 Wall Street predictions between the period of Dec-98 and Dec-12. How well did the gurus fare in aggregate?

Drum roll please….

The gurus were accurate with 46.9% of their predictions! It seems like we are better off flipping coins to decide the direction of the stock market. Below is the chart from CXO Advisory:

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http://www.cxoadvisory.com/gurus/

 

The table below shows the individual guru’s prediction performance.

Guru

Forecasts

Accuracy

Guru

Forecasts

Accuracy

David Nassar

44

68.20%

Trading Wire

69

47.80%

Ken Fisher

120

66.40%

Don Hays

85

47.10%

Jack Schannep

63

65.60%

James Stewart

115

47.00%

David Dreman

45

64.40%

Richard Band

31

46.90%

James Oberweis

35

62.90%

Jim Cramer

62

46.80%

Steve Sjuggerud

54

62.10%

Gary D. Halbert

93

46.40%

Cabot Market Letter

50

60.40%

Dennis Slothower

145

45.60%

Louis Navellier

152

60.00%

Bill Cara

208

45.60%

Jason Kelly

126

59.70%

Gary Savage

134

45.00%

Dan Sullivan

115

59.10%

Marc Faber

164

44.60%

John Buckingham

17

58.80%

Jeremy Grantham

40

44.20%

Richard Moroney

56

57.10%

Tim Wood

182

43.80%

Aden Sisters

40

55.80%

Jim Jubak

144

43.40%

Jon Markman

36

55.30%

Martin Goldberg

109

43.10%

Carl Swenlin

128

54.90%

Price Headley

352

42.00%

Bob Doll

161

54.70%

Linda Schurman

57

41.40%

Paul Tracy

52

53.80%

Donald Rowe

69

40.60%

Bob Brinker

44

53.30%

Igor Greenwald

37

40.50%

Mark Arbeter

230

53.20%

Nadeem Walayat

67

40.50%

Gary Kaltbaum

144

53.10%

Bob Hoye

57

40.00%

Robert Drach

19

52.60%

John Mauldin

211

39.90%

Don Luskin

201

52.00%

Jim Puplava

43

39.50%

Laszlo Birinyi

27

51.90%

Comstock Partners

224

37.90%

Tobin Smith

281

50.20%

Bill Fleckenstein

148

37.30%

James Dines

39

50.00%

Gary Shilling

41

36.60%

Ben Zacks

32

50.00%

Richard Russell

168

36.50%

Doug Kass

186

49.20%

Mike Paulenoff

12

35.70%

Richard Rhodes

42

48.80%

Abby Joseph Cohen

56

35.10%

Bernie Schaeffer

81

48.80%

Peter Eliades

29

34.50%

Clif Droke

100

48.60%

Steven Jon Kaplan

104

32.10%

Stephen Leeb

27

48.30%

Curt Hesler

97

32.10%

S&P Outlook

145

48.30%

Robert McHugh

132

28.60%

Carl Futia

98

48.20%

Steve Saville

35

23.70%

Charles Biderman

48

47.90%

Robert Prechter

24

20.80%

Do you have your favourite guru in the table?

I said CXO was brave to publish these results on their website because they received many hate mails from some of the gurus. CXO candidly dedicated a webpage of rebuttals and here is an interesting one from Jim Cramer:

Subject: You have got to be kidding me

There have been so many numerous audits of me and I also have an extended audited track record that shows you could not be more wrong. But you know what? Let the market decide. Do you think if I were as bad as your records show, I would ever have been able to

a. make $100 million in the market investing for myself,

b.have a show that has gained in audience at the time when you say I have done poorly, and

c. started one of the few FINANCIALLY successful websites out there in part because of subscribers to my newsletter and columns?

Here’s where I think your methodology goes wrong. I repeatedly recommend the same stocks from my own recommended list: NYX, SHLD, GOOG, MA, TM, CSCO, AAPL, GS, BA, JNJ, MO. I do it every week. I am sure you give me credit only once for those.

I have bothered to take the time out to write you this because you worked with a man of honor, Admiral Rickover.

I know you won’t correct anything that’s not what people do in our business but I still feel the need to explain to you why a sucker is NOT born every minute and my popularity rides not on showmanship but on rigor on my part and success on the part of the viewers and readers who use my work.

No need to respond.

jjc

It is hard to blame these gurus because some of them sell predictions for a living. They are able to sell predictions because investors want them. Humans hate uncertainty and that is why seers and prophets exist way back in history.

If not outlook, then what?

Investors are misled that they need to know where the market is going in order to make profits. They look too far into the future and trusting the fortune tellers too much.  We must know what we can control and what we cannot. I had this revelation taking a lift.

If a stock is undervalued and fundamentally strong, buy it! If you worry about the market is going to collapse, you will never pull the trigger. If you put on a negative lens, I will guarantee you will find enough bad news about the stock market. If you put on a set of optimistic lens, I will guarantee you will see all the good news supporting an ever rising stock market. We see what we want to see. How do we maintain our objectivity doing a proper valuation when we are subjected to such biases?

Some investors would worry they may hold stocks during a market crash and sustain large paper losses. There is no free lunch in this world. That is the price of investing in stocks. The volatility is always there and that is why stock investors are compensated with a higher return than bond investors. Volatility (both upside and downside) is part and parcel of stock investing. It is a roller coaster ride and it isn’t wise trying to jump in and out of the car. Prep yourself psychologically, strap on and enjoy the ride.

We are not lacking information today but we are not making wiser decisions. The relentless pursuit for certainty in the future is resulting in poor decisions today. I think we have a greater chance of making money focusing on the now than repeatedly making futile attempts to predict the future. Our lives will be less stressful too.



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3 Comments
  • Anthony
    Posted at 11:59h, 23 February Reply

    I’m not on those gurus side as I never spend a minute watching them. However, just looking at the accuracy of their prediction is just half of the story and to be exact, it’s useless. You can follow a great guru on the tv that can predict with 90% accuracy yet it’s possible that you can still lose money following him.

    “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”
    ~ George Soros

    “In this business, if you’re good, you’re right six times out of 10. You’re never going to be right nine times out of 10.”
    ~ Peter Lynch

    You can still make a lot of money if you are right only 3 times out of 10.

    • Alvin Chow
      Posted at 12:12h, 23 February Reply

      Thanks for the comment. Let me clarify what you are said was a slightly different context.

      I know what you mean – expectancy. I wrote an article about it previously: http://www.bigfatpurse.com/2009/01/you-can-lose-money-even-if-you-select-the-right-stocks/

      I am referring to predicting. We should stop doing that. Having a positive expectancy does not mean one must predict the future. We can look at the current facts and make a decision. It may be a right decision and a wrong decision. We can still end up profitable even though we made quite a number of wrong decisions.

      The question you asked suggest to me you are a trader (I can be wrong). Do you think high accuracy strategies are most likely to blow up?

      • Anthony
        Posted at 15:32h, 26 February Reply

        Most of the time I’m trading and I do have a few long term investment as well especially when they’re really undervalued.

        IMHO, high accuracy strategy doesn’t mean it will blow up our account. We should find the right balance with it. Typically a strategy that have low winning rate have high win loss ratio and a high winning rate will usually comes with a low win loss ratio.

        Some traders can’t withstand with a 7 losing streak out of 10 trades and others can’t take losses that are a few times bigger than their winners. As long as it has positive expectancy and suits the trader personality and also with the discipline to stick with it during the ugly drawdown periods.

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