{"id":41826,"date":"2013-09-09T13:24:53","date_gmt":"2013-09-09T17:24:53","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=41826"},"modified":"2013-09-09T13:24:53","modified_gmt":"2013-09-09T17:24:53","slug":"forecasts-are-useless","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/09\/09\/forecasts-are-useless\/","title":{"rendered":"Forecasts are Useless"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/p>\n

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It\u2019s tough to make predictions.\u00a0 Especially about the future.<\/strong><\/p>\n<\/blockquote>\n

The quote above is alternatively attributed to the physicist Neils Bohr and to the New York Yankee catcher Yogi Berra.\u00a0\u00a0 But it is nonetheless true, particularly in the financial markets.<\/p>\n

Of course, that doesn\u2019t seem to stop us from trying.<\/p>\n

I bring this up because Barron\u2019s<\/i> recently polled its \u201c10 Street Seers<\/a>,\u201d an elite group of Wall Street strategists, to get their forecasts for S&P 500 year-end value, the 10-year Treasury yield and more.\u00a0 The results were a little underwhelming.<\/p>\n

On average, the analysts expected the S&P 500 to rise by 65 points\u2014or about 4% from current levels.\u00a0 The most bearish analyst saw the S&P 500 shedding 33 points. The highest forecast was also the most popular; three out of the ten saw the S&P 500 adding 117 points to 1750 by year end.\u00a0 The entire range of forecasts was only 150 points; not a lot of independent thought here.<\/p>\n

The forecasts for the 10-year Treasury yield were even less diverse.\u00a0\u00a0 The average forecast was for a 0.12% rise in yield.\u00a0 Four of the ten analysts had a target yield of 3%, and the range from highest estimate to lowest estimate was a pitiful 50 basis points.<\/p>\n

These are ten extremely bright people with ten forecasts that are noteworthy only for their lack of originality.\u00a0 What gives?\u00a0 Why the excessive conservatism?<\/p>\n

Wall Street analysts aren\u2019t that different from the rest of us.\u00a0 They suffer from a recency bias<\/a>, or a tendency to give a disproportionate importance to recent events. Yet at the same time, they have a tendency to anchor and adjust<\/a> their forecast rather than start a fresh forecast with revised assumptions.\u00a0 And capping it all off, they are prone to groupthink and herding behavior<\/a>.\u00a0 And finally, there is what I like to call the \u201csave your ass\u201d bias.\u00a0 If a forecaster makes a bold call\u2014and turns out to be wrong\u2014he is probably going to be out of a job.\u00a0 This incentivizes them to make their forecast within a tight band of acceptable, consensus thinking.<\/p>\n

All of these combine to make a foul cocktail of conflicting mental impulses that give us forecasts that are consistently too bland to be useful.<\/p>\n

I have a piece of advice: Don\u2019t waste your time forecasting.\u00a0 <\/b><\/p>\n

You should have a basic understanding of the macro environment you are in, and you should have an opinion of, say, the direction the stock market or interest rates are likely to go.\u00a0 But this kind of thinking shouldn\u2019t occupy a lot of your time, and there is no value in being overly precise in your estimates.<\/p>\n

Instead of focusing on the precise interest rate, think in terms of contingencies.\u00a0 What would happen to my portfolio if interest rates shot higher?\u00a0 And what can I do to mitigate that risk?\u00a0 And importantly, at current market prices, am I being compensated adequately for the risks I\u2019m taking?<\/p>\n

As a practical example, I expect bond yields to fall from current levels, as I believe that the tapering fears are vastly overdone.\u00a0 But I also know that I could be wrong about that.\u00a0 To protect my Dividend Growth Portfolio<\/a><\/strong> from this risk, I am focusing on companies with a history of aggressively raising their dividends rather than focusing on high current yield.<\/p>\n

As they say, past performance is no guarantee of future results.\u00a0 A company with a long history of paying dividends can abruptly stop. We saw plenty of that in 2008 and 2009.\u00a0 But I would trust a good company\u2019s dividend record before I put my faith in a Wall Street forecast.<\/p>\n

This piece first appeared on MarketWatch<\/a>.<\/p>\n

Charles Lewis Sizemore, CFA, is the editor of the\u00a0Sizemore Investment Letter<\/a>\u00a0and the chief investment officer of investments firm Sizemore Capital Management. \u00a0Click here<\/a>\u00a0to learn about his top 5 global investing trends and get your copy of \u201cThe Top 5 Million Dollar Trends of 2013.\u201d<\/em><\/p>\n

This article first appeared on Sizemore Insights as Forecasts are Useless<\/a><\/p>\n

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