Updated: Sep 2, 2021
"Extraordinary claims should require extraordinary evidence to be believed." - Kevin Kelly, The Technium Blog.
I keep a running list of potential topics, but it's more chaos than order. There's no science in choosing what to write about. It's a mix of gut feeling, current events, and the week's conversations.
The one thing that is obvious- a good topic writes itself. If I have a good topic, the words come easy and fluid. A poor topic leaves me paralyzed, a flurry of typing and deleting until I inevitably look for something else to write about.
This particular day in July of 2020, I must have stared at the screen for an hour. I had nothing.
It was time to write our mid-year market commentary. I felt like an imposter even attempting to digest what just happened in the financial markets, let alone have any opinion on what may happen next. It made me question why anyone would publish market commentary in the first place.
Well, anyone can publish market commentary. Wall Street firms have made the annual charade a "tradition like any other," to borrow a quote from CBS' Jim Nantz to describe the Masters golf tournament.
I don't mean that in a good way.
According to Paul Hickey of Bespoke Investment Group, the median Wall Street forecast from 2000 through 2020 missed its target by an average of 12.9 percentage points!
“The fact that the average spread between analysts’ forecasts and the actual performance of the market in that year is over 12 percentage points, I think, is pretty damning, in and of itself.” When the strategists are so off target, he added, “What good is the target in the first place?” - NY Times article Clueless About 2020, Wall Street Forecasters Are at It Again for 2021.
How did Wall Street fare for 2020 predictions? (You can review last year's predictions here).
Our suited and booted friends called for single digit returns for the S&P. As of this writing (12/21/20), the S&P was up ~16% for 2020. Wrong, but not outlandishly terrible.
The smart-sounding narratives that backed up their 2020 return predictions? Not even on the same planet.
Now, you would think such a futile annual record would encourage some humility. Did they preface this year's forecasts with a "we don't know anything, take this with a grain of salt"?
Not so much. Despite an error rate so high they would be unemployable in any other field, we bring you Barron's Wall Street 2021 predictions...
The above chart shows 2021 S&P 500 price targets from Wall Street strategists and chief investment officers. Taking the average of their forecasts (a term we use rather loosely), the expectation is for U.S. stocks to return ~+10% in 2021.
A neat and tidy 10% return sounds good, right? Sure. But remember, Wall Street's forecasts have been wrong by almost 13% per year. Using their 10% expected return as the average or mean, we get a range of -3% to 23%. Seems more like a wild guess than a useful forecast.
You might say, Geez Nik, aren't you being a little harsh?
Not really, when you think about even one misguided investor making a decision with their life savings based on guesses presented as fact.
What's a better alternative?
Not making predictions or seeking them. Amateurs make forecasts.
Professionals think in probabilities, weighing the range of potential outcomes.
According to the Capital Group, since 1949 a bear market (defined by a 20% drop), happens roughly once every six years. That means ~17% of the time things are going to get uncomfortable.
The other ~80% of the time we can hopefully enjoy the fruits of stock market investing.
Every now and again, random stuff is going to happen. Look no further than 2020.
Dealing in round numbers, we might say to ourselves...
20% of the time I'm going to suffer some losses
5% of the time things are going to get really weird (2008, 2020)
75% of the time is where I can potentially earn a positive return
By framing a range of potential outcomes and assigning a rough probability to each, we won't be surprised by surprises nor abort a sound investment plan because markets aren't behaving.
Matthew McConaughey's new book "Greenlights," talks about the randomness of life, which applies nicely to investing...
"Don't act so surprised, unbelievable happens all the time, sometimes it's divine, and sometimes it's a loogie in our face. Don't deny it. Depend on it, expect it. Believe it."
Pure Portfolios is still glad to be forecast-free since 2016.