Do You Think You Can Be Effective in Market Forecasting?

I wish I had a dollar for every market forecast I’ve ever seen. While predicting economic and market events has become something akin to a sporting event, sometimes a forecast can be useful. I advise you to consider the following anytime you read or hear a financial forecast, to avoid getting duped:

1. What is the motivation of the forecaster?

If a bio-tech analyst tells you that bio-techs are a screaming buy, is that as reliable as someone whose livelihood isn’t directly impacted by bio-tech stock performance? To take this a giant step forward, did you ever notice how a decided majority of guests on financial TV shows are optimistic, all the time? Now you know why.

2. Is that person speaking in absolutes, or leaving open the possibility that they are wrong?

Don’t let someone’s high level of conviction influence you too much. For more on this, see the first bullet point.

3. What is the forecaster’s experience?:

In an era where any college kid, barber, or entertainer can create a blog and wax poetic about investing, you have to be careful.

Yes, making a lucky buy in a stock that then experiences tremendous growth does occasionally happen. The key, however, is luck. To use a modern example, someone who bought shares of one of today’s leading technology firms back at the time of its IPO would probably be very pleased with their investment—however; there were many other tech IPOs in that era—some of which seemed even more promising than that company—whose investors ended up losing everything. Luck, more than wise selection, was the contributing factor to success.

It is important to understand that no one can predict the future with certainty. Investors should take so-called expert forecasts with a grain of salt. Effective portfolio management is not about forecasting the future and then clinging to that forecast. It’s about continuously evaluating information and market conditions and then making adjustments when necessary to pursue the ultimate goal. To paraphrase long time market watcher Steve Leuthold, “Predictions are for show, our decisions within the portfolio are for dough.”

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