Internet websites and television programming that focus on investment strategies are replete with expert advice, stock picks, and general market predictions. Unfortunately, experts with the most extreme and polarized opinions seem to receive the most exposure. Someone who claims that oil will reach $200 a barrel by year end or that the stock market is due to plunge 10% or 20% in the next month generate more interest than a common sense advisor who suggests that the market will rise marginally in line with modest economic growth.
Novice investors may be tempted to act on expert recommendations, especially when the education, experience, and track record of a pundit is impressive. However, while investment experts are constantly making predictions regarding stock performance, the media and public do not usually revisit these predictions at a later date to determine the accuracy of such forecasts.
In May 2010, I recorded several expert predictions from well-respected analysts that reflected divergent views about where stock markets were headed. Now that almost a year has passed, it is interesting to analyze their accuracy:
Nouriel Roubini
Nouriel Roubini is a professor of economics at the Stern School of Business at New York University. He holds a doctorate degree in international economics from Harvard and has held many prestigious positions with the World Bank, the Federal Reserve, and the International Monetary Fund. He correctly predicted the real estate bubble’s dire impact on the stock market years before it occurred.
However, on May 20, 2010, Mr. Roubini predicted that stocks would fall another 20% from their current levels at the time and that a double-dip recession was likely. The U.S. stock market, as represented by the S&P 500, did fall in the months following Roubini’s prediction, but the lowest close of 1028.06 on July 6, 2010 only amounted to about a 5% drop from the prediction date. Almost a year later, the S&P 500 sits at 1329, representing a 24% increase since the date that Mr. Roubini suggested that a market drop was imminent.
Richard Russell
Just four days after Mr. Roubini’s prediction, Richard Russell stated that the “losses in this bear market are going to be phenomenal.” Mr. Russell has written a financial newsletter called The Dow Theory Letters since 1958. His investment approach is based upon the Dow Theory, a form of technical analysis that was devised by Charles Dow, the founder of the Wall Street Journal and co-founder of the Dow Jones & Company.
At the time of Mr. Russell’s prediction on May 24, 2010, most of the losses in the bear market had already occurred. Since that time, the market has risen about 25% and the further losses he predicted did not occur.
David Kotok
Mr. Kotok is the founder of Cumberland Advisors and has acted as its Chief Investment Advisor since its inception in 1973. He holds three degrees from the University of Pennsylvania, including a Bachelor of Science in Economics from the Wharton School of Business. He is a regular contributor on CNBC and has written articles in the New York Times and the Wall Street Journal about financial market issues.
In May 2010, Mr. Kotok boldly predicted that the S&P 500 would reach between 1250 and 1300 by the end of 2010, which represented an increase of about of between 15% and 20%. In fact, the S&P 500 closed at 1257.64 on the last trading day of 2010 and had reached an intraday high of 2062.60 earlier in December.
The above discussion serves as a warning that well-respected experts in financial analysis are often wrong. People tend to remember their successful predictions rather than their misses. Though some predictions will be correct, it is usually difficult to choose the winners. Rather than placing a bet that the market will either rise or fall dramatically in a short time period, it is more prudent for investors to take a longer term approach that includes investing in a range of asset classes with a risk profile that is suitable for an individual’s unique situation. Otherwise, investing starts to look a lot like gambling.
