Saturday, October 2, 2010

Predictions Sure To Go Wrong

One of the favorite parts of my morning routine is listening to Mike and Mike in the Morning on ESPN Radio.  One thing I love about them is that, unlike most of their contemporaries, they don't take themselves too seriously.  Like most sports talk shows, they make their own predictions, but in the spirit of the show, they refer to them as "Predictions Sure To Go Wrong".  They clearly understand that predicting who is going to win the weekend's game is an inexact science.  In fact, calling it an inexact science is an insult to true inexact sciences, like meteorology.  However, the most inexact of all sciences is predicting the stock market.

Consider Robert Kiyosaki of Rich Dad, Poor Dad fame.  I must admit, I have not read his many books, but I understand that he markets himself as a expert on making money (which, judging by his book sales, he is quite an expert at just that).  Mr. Kiyosaki has a column on Yahoo! Finance where he often writes about his economic predictions.  This past January, here was his prediction on how the stock market would do in 2010:

"Dead cat bounce. The current stock market rally will probably turn into a dead cat bounce. If the Dow drops below 6500, 5,000 may be the next stop."

In a subsequent article, he goes on to explain what he means by a "dead cat bounce":

"The market crashes, rebounds, and runs out of steam, then crashes again…unfortunately, and possibly, to a lower low.  When professional investors observe a ‘dead cat’ forming, many will begin to sell. If their selling leads to a panic, the stock market goes even lower."

When Mr. Kiyosaki made his "dead cat bounce" prediction on 12/29/2009, the Dow Jones Industrial Average was at 10,605.65.  Today, the DJIA is 10,829.68 for a gain of 1%.  Yes, it isn't a big gain, but it is a heck of a lot better than his doomsday prediction of 6500 or less.

In fairness, Mr Kiyosaki wasn't alone in predicting doom and gloom for the stock market in 2010:

 Like this:

"After the 1930 rally, the DJIA collapsed 86% -- which lasted two more years. If history repeats, that puts us at around 5000 in 2010 and 1400 by January 2012, and it will feel like the end of the world-- just like the Mayans predicted."

Or this:

"According to Hall's charts, it's because we're headed for a second dip, as the general slide into pessimism accumulates inertia, which leads to increased feelings of anger, fear, and polarization — and a general 'throw the bums out' sentiment. 'There's a pretty strong case that bear markets tend to track with incumbents losing their seats,' he told me. 'Obama rode that mood in, but now that he's in office his popularity has continued to decline.'"

Of course, for every doom and gloom prediction, you have a prediction list this:

"But there's a case to be made that there's still more upside in the stock market than pessimists might think--and it's entirely possible the Dow will hit the 12,000 mark in 2010."

Or even like this:

"As the real economy's challenges start to catch up with the ebullience of the stock market, and with no second wind to boost growth forward, the U.S. markets will face challenges in the second half of the year, as earnings growth doesn't materialize as expected. The Dow Jones Industrial Average will close roughly flat for the year."

That last one seems like it has the best chance of being accurate.

My point is that even the so-called experts who dedicate their lives to this stuff have no clue what is going to happen to the stock market.  In a previous article, I gave examples of how even professional money managers - people who are supposedly getting paid to pick the best stocks - can't seem to get it right either.  Even if they do get it right, usually it is because of dumb luck.  The phrase "even a blind squirrel finds a nut" comes to mind.

The thing to remember is that the stock market moves in unpredictable ways.  Who could have predicted the BP oil spill?  Who could have predicted the death of Senator Edward Kennedy?  Who could have predicted the widefires in Russia?  All of these events had impacts on the stock market, but yet nobody could have known they were going to happen.  Anybody who offers a prediction on the stock market is making a prediction sure to go wrong.  They are either deluded into thinking that they are an "expert", or they are looking to extract money from an unsuspecting public. 


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