We’ve written about this topic a lot, but it was recently taken up by Larry Swedroe at Wise Investing. Although I have some philosophical differences about how to construct a portfolio, I completely agree with his take on the uselessness of forecasts. He summarizes from a book by William Sherden, The Fortune Sellers:
Sherden reviewed the leading research on forecasting accuracy from 1979 to 1995 and covering forecasts made from 1970 to 1995. He concluded that:
- Economists cannot predict the turning points in the economy. He found that of the 48 predictions made by economists, 46 missed the turning points.
- Economists’ forecasting skill is about as good as guessing. Even the economists who directly or indirectly run the economy (such as the Fed, the Council of Economic Advisors and the Congressional Budget Office) had forecasting records that were worse than pure chance.
- There are no economic forecasters who consistently lead the pack in forecasting accuracy.
- There are no economic ideologies that produce superior forecasts.
- Increased sophistication provided no improvement in forecasting accuracy.
- Consensus forecasts don’t improve accuracy.
- Forecasts may be affected by psychological bias. Some economists are perpetually optimistic and others perpetually pessimistic.
In other words, pay no attention to the man behind the curtain. It doesn’t matter whether an expert is predicting a Greek default, a bear market, or a rally in commodities—they really have no idea. About the best you can do is determine what the market is actually doing right now.
Instead of wasting our time on forecasts, we pay attention to relative performance. When an asset strengthens, we are interested in owning it. If it is performing poorly, not so much. Relative strength allows supply and demand, as reflected in market pricing, to make the decision about what is valuable or not at any given time. It allows the portfolio to change as conditions change, without requiring useless forecasting.