Monkey Throwing Darts

Evidence of the Failure of the Market Gurus

Monkey Throwing Darts

The pied pipers of Wall Street do not have a good batting average. No Babe Ruths here. Smartmoney.com has been tracking the pundits dating back to 1997. The table below summarizes the batting averages of several of these market pundits. You can see that Ed Hyman has the best batting average with a 0.236 and Ed Hyman is considered one of the best economists. That is the equivalent of hitting an average double each time at bat. Or in the scoring system, a call that may win plaudits for accuracy but not for insight and strong feeling. Often a general statement that comes true. For example, the forecaster made a correct but obvious and wishy-washy call about the direction of interest rates. For those who scored lower, it generally means a true dud of a pick or a mostly inaccurate prediction that might have one redeeming feature but that likely fails the degree of difficulty and/or confidence tests. A batting average of 0.400 would indicate an accurate forecast that was difficult to make but still uttered with the utmost confidence.

Here are the averages as reported by Smartmoney, where the the average batting average for all 12 forecasters was somewhere between first and second base, 0.166. Since an accurate call would yield an average of 0.400, the most repected and well known market forecaster fall on the side of inaccuracy about 60% of the time and accuracy about 40% of the time.

For further evidence of the heavy fog in crystal balls, let’s take a look at results from 2003 and predictions about them. In that year, stock prices rose in almost every global market. Returns for U.S. small company stocks were particularly strong; the total return for the Russell 2000 Index was 47.25%, the highest annual return since inception of the index in 1979, according to Russell Analytic Service; and the total return for the CRSP 9-10 Index was in excess of 70%, the highest annual return since 1967, according to the Center for Research in Security Prices, University of Chicago.

However, investors seeking to capture market rates of return in 2003 would have had to ignore a large body of opinion, a sample of which appears below, suggesting that stocks were unattractive. Most of the quotations listed appeared during the first quarter of 2003 when stock prices were slumping and the outlook most uncertain. Year-to-date returns for the S&P 500 and Russell 2000 Indices did not turn positive until mid-April.

One concept that investors need to remember is that the probability of getting a forecast correct maybe much higher than they expect it to be. For example, if an event has a 10% chance of occurrence and you make 10 forecasts about that event, there is a 65.13% chance that one of those guesses will be correct. See the chart below and test your own assumptions about forecasts.