If you are relying on Wall Street to guide you through the investment maze, you should be aware of this shocking fact:
At the end of every year, financial publications report on the consensus of Wall Street “experts”, who predict market returns for the next year. Sali Mehta analyzed the accuracy of these forecasts for a twenty-year period.
As a case in point, in the 1/3 of all the years coinciding to when the markets dropped, take a guess at how many of those years did the consensus price estimate also show a drop?
A spectacular ZERO.
Why it matters
Obviously, as Mehta notes, this fact demonstrates “both no accuracy, and no value in the advice.” These forecasts are meaningless. But the ramifications are staggering.
If the best and the brightest on Wall Street can’t predict a down market, why are you relying on your broker or the financial media to predict:
- Which stocks will go up or down?
- The direction of the market?
- Which investment products are likely to generate outsized returns?
- Which asset classes are likely to outperform?
- Which actively managed mutual funds are likely to outperform?
The logical import of Mehta’s finding is that the “guidance” you receive from your broker (based on opinions about what’s likely to happen in the future), is worthless.
Ramifications for the financial media
The majority of the financial media consists of making predictions. It features fund managers and other pundits justifying their (often conflicting) views on what’s likely to happen with a particular stock or fund, or how “breaking news” might affect the direction of the market.
A cursory review of the website of CNBC yielded these stories:
- What’s behind the big commodities rally, and why it could be just getting started.
- Morgan Stanley: Apple stock may fall on ‘materially’ weaker iPhone sales, but then it is time to buy
- Once-hot semi stocks just took a huge hit, and some see more pain
- Amazon shares to rally another 15% as it captures the ‘next wave’ of online retail: Credit Suisse
Perfect examples of information with “no value.” Worse still, it’s likely to be harmful to those who rely on it.
Mehta provides this advice. Cut this part of this newsletter out and post it somewhere where you will see it every day:
Wall Street strategists happily talk about “price targets” as though this concept has any value. They falsely make the process appear scientific by providing a dash of “fundamental” economic data to help substantiate their work. But then they grotesquely gravy over this with a “price multiple” swag that entirely invalidates any underlying reasoning. For this useless guess, they hope you’re imprudent enough to pay them large sums of your hard-earned money to be told simply what you want.
Resource of the week
I highly recommend Preston McSwain’s blog post about Mehta’s research and gives compelling reasons why you should ignore market forecasts.