Anyone who has read my blog over the years knows that I don’t make predictions. Trying to guess where the market might be in a few quarters is about as useful as forecasting the weather out a few months. I read lots of commentary about the market, and always have to chuckle when I see a truly outrageous forecast. By the way, if you want to appear on television as a “market guru” be sure to bring a few outrageous forecasts with you. They are the most “newsworthy” ones. No one wants to hear your middle of pack predictions…
Anyway, I chuckle at these wild forecasts mostly because the people spouting them usually are not professional investors. And even if they are, no one is likely to remember their incorrect forecast (most are incorrect, no?), and if by some small chance they are correct, the upside might be huge (I have known people on Wall Street who made a career out of being right once…)
So, let’s go back in time to February 2012. We had just finished a very volatile year (2011) and people were debating which way the U.S. stock might be headed. I always think a better question than “Where do you think the market is going?” is “How is your portfolio invested right now?” To my surprise, Barron’s cover for its February 13, 2012 edition (see above) made the bold prediction that the Dow Jones Industrial Average would reach the 15,000 level by the end of 2013. At the time, it did seem like a very brash forecast. The DJIA was about 12,500 at the time.
I had a number of issues with this cover. First of all, almost no professional investor measures performance against the DJIA. It’s only 30 stocks, it’s price weighted (that is stock with higher prices have more influence on the index than lower-priced ones) and it’s comprised of only big-cap, blue-chip stocks. Second, any strategist worth his or her salt does not give both level and time frame for a forecast. Hence, “The DJIA will reach 15,000” is a “good” forecast. Equally fine would be “The DJIA will trend higher by next summer.” To say “The DJIA will be at 15,000 by the end of 2013” is way too specific to be credible. The third and final issue I had was that the forecast, despite what I thought at first glance, was not really that bold. It represented only a 20% increase in a period of almost two years. That averages out to be about the long-term average for stocks. Not exactly swinging for the fence on this one…
Nonetheless, I was somewhat impressed at Barron’s moxie to print such a lead story. We discussed this idea a bit at our Investment Policy Committee meetings, reaching as we usually do, no meaningful consensus about “the market.” We spend more time figuring out which undervalued stocks to buy. For some reason, I cut out the center panel of the cover, and with a black sharpie crossed out the 5 in “15,000” and with a red pen wrote a “6” next to it. Thus was born a rare forecast from yours truly. I pinned the modified cover on the big map that adorns my office wall. See photo below.
In the name of full disclosure, this forecast was never mentioned outside our firm. No bets were made; no consideration ever offered or given. In true Wall Street fashion, I did not specify the time frame for my “forecast.” I simply stated that the DJIA will reach 16,000. Well, miracle of miracles, wonder of wonders, the DJIA hit the 16,000 market last week – near the end of the year. One could argue that because I used the Barron’s cover, the implied time frame for my forecast was the end of 2013. One could possibly conclude that I made one of the best calls of the last two years, predicting the level and time frame for the most popular and widely quoted stock index!
That said, my “success” with this forecast underscores how useless most predictions are. No one made any money based on this forecast. I did not buy more stocks because of this forecast (I was fully invested in stocks at the time anyway). I was not quoted in the media. My level of fame has not changed since I nailed this forecast (my Q Score has hovered around zero for about 30 years now…). None of my IPC colleagues talked about it to anyone else. They did not adjust their portfolio based on it. Almost no one knew about it (those who did probably forgot about it a week later…). Most importantly, had it been wrong, nobody (including myself) would bother even mentioning it. Herein lies the biggest risk of listening and acting on forecasts – the forecasters tend to remember and highlight the correct ones and ignore, rationalize or blithely dismiss the wrong ones.
So, where do I think the DJIA is going from here? I predict that it will display volatility, both now and into the future. And that is one prediction I can stand behind with confidence… =)