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Q4 2019 hedge fund letters, conferences and more
Market forecasters know their fallibility, which is why they rarely offer predictions with specific timeframes – it would make it too easy for fact-checkers like me to hold them accountable. When one prominent forecaster – John Mauldin – boldly attached a five-year horizon to his predictions, it gave me an opportunity to look back and hold him accountable.
Let’s look at the academic research behind the accuracy of forecasters and then the record of Mauldin’s predictions five years ago.
There’s a large body of evidence demonstrating that stock market forecasts have no value (though they supply plenty of fodder for my writings) because their accuracy is no better than one would randomly expect. For example, David Bailey, Jonathan Borwein, Amir Salehipour and Marcos López de Prado, authors of the March 2017 study, Evaluation and Ranking of Market Forecasters, covering 6,627 market forecasts (specifically for the S&P 500 Index) made by 68 forecasters who employed technical, fundamental and sentiment indicators, and the period 1998 through 2012, found:
- Across all forecasts, accuracy was 48% – worse than the proverbial flip of a coin.
- Two-thirds of forecasters had accuracy scores below 50%.
- About 40% of forecasters had an accuracy score between 40% and 50%.
- About 3% of forecasters fell in the left tail, with accuracy scores below 20%.
- About 6% of forecasters fell in the far right tail, with accuracy scores between 70% and 79%.
- The highest accuracy score was 78% and the lowest was 17%.
The distribution of forecasting accuracy by the gurus examined in the study looks very much like the common bell curve –what you would expect from random processes. That makes it very difficult to tell if any skill is present.
Evidence such as this led Warren Buffett to state, “We have long felt that the only value of stock forecasters is to make fortune-tellers look good. Even now, Charlie (Munger) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.” Remarking on the value of forecasts, Wall Street Journal columnist Jason Zweig stated “Whenever some analyst seems to know what he’s talking about, remember that pigs will fly before he’ll ever release a full list of his past forecasts, including the bloopers.”
Accountability ruins the game
Zweig’s insight is why you rarely see the financial media hold forecasters accountable by reviewing their prior forecasts – accountability would ruin the game and no one would “tune in.” The lack of accountability by the media motivates me to make it a regular practice to do so.
This article turns its lens on John Mauldin, a well-known author, financial writer and market analyst. His website states, “On behalf of subscribers to Mauldin Economics, John taps into his network either directly or through the reams of high-level research he’s privy to on a regular basis, to assist in identifying the smartest investments for today’s markets. These ideas are then carefully screened and evaluated by a team of ace analysts, with only the best of the best brought to the attention of Mauldin Economics subscribers. This is important to you, because it gives you the equivalent of direct access – just one small step removed – to some of the brightest minds and most successful managers in the world today.”
Mauldin was one of the many forecasters included in the aforementioned study “Evaluation and Ranking of Market Forecasters.” He had one of the worst scores, coming in 36th, just behind CNBC’s Jim Cramer, who was 37th. Today we’ll review Mauldin’s 2015 five-year global financial forecast. (Those forecasts came well after the period covered by the evaluation and ranking study; perhaps his scores would improve.) Mauldin chose to do a five-year forecast, “more useful to long-term investors,” while admitting “an annual forecast … is as much a guessing game as anything else (and I am bad at guessing games).”
Read the full article here by Larry Swedroe, Advisor Perspectives
