Fool Me Twice?
By: Mary E. Brunson | Jan 12, 2011
It's that time again; the wonderful time of the year when financial pundits clamor for blog space and camera time to share their predictions about how the market will behave in 2011.
Who can blame them? Inquiring minds want to know, and heck, they have nothing to lose and everything to gain because no one actually expects them to be right, but if they are — they'll achieve guru status.
So far, we have heard predictions on the growth of the economy, sectors, industries, inflation, and new consumer products that are sure to lure dollars out of savings and into commerce.
Certainly, a handful of them may turn out to be right (by chance alone), but before we set our financial compasses in any one direction, or permit ourselves to be pulled into the vortex of predictions, it might be wise to look back at a handful of last year's "big" predictions as reviewed by SmartMoney.com, and see just how accurate they turned out to be.
- Last year, Chief U.S. economist Dean Maki predicted a solid growth in U.S. GDP of 3.5%. His optimism went largely unrewarded as the growth was about 2.7%. He blames "surprises" like declining exports and surging imports. So what does he predict 2011? He has decided to split the difference at 3.1%.
- Robert Shiller was perhaps "irrationally un-exuberant" when he predicted a double dip in the housing market in 2010. He argued a disappearing tax credit would cause folks to lose interest in buying a home. In reality, the housing market was up for the year. What is Shiller's prediction for housing in 2011? He refuses to make one.
- Bill Dunkelberg, chief economist at the National Federation of Independent Business, predicted that small businesses would boost borrowing to buy equipment and increase inventories. Even though the recession officially "ended" in June 2009, business owners failed to step up to the plate. The Federation said that more than half its members declined to take out loans in 2010. Dunkelberg has renewed his prediction for 2011, saying that it will be a year for business borrowing.
- The economist formerly known as "Dr. Doom" may see the end of his 15 minutes of fame. --Nouriel Roubini predicted that 2010 would be embroiled in deflation, partially the result of falling demand for goods. Nope. It turns out that the seasonally adjusted annual rate of inflation was 1%.
- Harry Dent, founder and CEO of the economic think tank HS Dent, foretold an economic apocalypse in 2010. In the summer of 2009, he predicted the market was going to go into a freefall throughout 2010 and 2011, with the DJIA bottoming out somewhere between 7,200 and 3,800 in mid-2012. Despite the DJIA's rise of 11% in 2010, Dent remains unwavering in his doomsday prophecy, stating "The markets will go up into March 2011 or so, but will then start to correct themselves." Apparently, his crystal ball is very clear to see so far ahead.
So there we have it, a very short list of the year that was foretold and the year that actually unfurled.
The primary problem with predictions is that they rely heavily on old news to predict new news. But, we see time and time again the failure of this practice.
In a more than timely coincidence, Burton Malkiel has just released his tenth edition of A Random Walk Down Wall Street. The original title was released some 40 years ago, and has sold more than 1.5 million copies.
Throughout the years and editions, Malkiel's message has changed little, continuing to tell us that you can't beat the market. In other words, you can't rely on predictions about future events to improve upon the returns that the market dishes out.
The essence of his message is clear, stock prices efficiently incorporate all information available at any given time and trade at fair value. There are no profits sitting around, waiting to be picked up by investors.
"Who knows what the future is going to be," but "the market is efficient enough so that it is unbeatable," he says.
Malkiel was recently interviewed by Henry Blodget who asked the pointed, but obvious question: "If you turn on CNBC there is a parade of people – people who get paid for their work and advice -- who actually think they can beat the market. Are these people dishonest or just completely delusional?"
Malkiel answered that behavioral economics suggest this hope is based on delusion. "People really do believe that they live in Lake Wobegon [and] that they are better than average," he stated but then added "When you are getting paid very handsomely for your advice, it is quite easy to be delusional."
Need a fresh resolution for this year and for good: Stop trusting the pundits and their endless stream of predictions. Trust the markets instead.
Watch Burton Malkiel's interview on tech ticker, and read the full article "Markets Aren’t 100% Efficient, But You Still Can’t Beat ‘Em"