Take a look at the newsstand. ’Tis the season for market predictions. Of course, I’d categorize this annual spate of articles under the heading of “fantasy” rather than “finance.” Not unlike weather forecasts, market predictions—even those from reputable sources—are wrong more often than they are right. Simply, in spite of the headlines to the contrary, future market performance is unknowable. And that makes investing according to these predictions a dangerous way to manage money.
Just how wrong can the best investment minds be? Consider Howard Gold’s article, 4 Things Doom-and-Gloomers Got Totally Wrong. Gold holds that extreme market views sell newspapers and that in the aftermath of the Great Recession, doom and gloom replaced the enthusiasm of a bull market. He notes that in the nearly six years after Lehman Brothers’ collapse, “the worst hasn’t happened—unless you consider a 180% advance in the S&P 500 Index a disaster.” Furthermore, Gold addresses these four forecasts that could not have been more wrong:
- The stock market will crash. Gold begins by pointing out the faulty forecast of Harry Dent, whose book, The Great Depression Ahead, was published in 2009. Dent advised investors to stay out of the market between early 2012 and late 2013, a time when the S&P 500 advanced nearly 50%. Dent wasn’t alone. In July 2010, analyst Robert Prechter predicted that “the Dow, which now stands at 9,686.48, is likely to fall well below 1,000 over perhaps five or six years as a grand market cycle comes to an end.” Prechter suggested the market decline would be both epic and long-lasting. Yet, on December 26, 2014, the Dow hit an all-time closing high of 18,053.71. What’s more, the S&P 500 ended the day at 2,088.77, a new record close. However, there was plenty of buzz about a “double-dip recession” that never materialized. In fact, the phrase was mentioned 10.8 million times in 2010 and 2011, according to Google. And, almost predictably, there was virtually no mention of “financial collapse” in 2006 and 2007—and we know what happened in 2008.
- The euro will fail. During the European debt crisis, many experts believed the single currency would not survive. Gold references an article in The Economist in November 2011 that states, “Without a dramatic change of heart by the European Central Bank (ECB) and by European leaders, the single currency could break up within weeks.” He adds that former Federal Reserve Chairman Alan Greenspan also expected the euro to fail. Of course, then came ECB President Mario Draghi’s memorable speech on July 26, 2012 when he vowed to do “whatever it takes to preserve the euro,” adding, “and believe me, it will be enough.” Clearly it was, as the hardest hit European nations of Greece, Spain, Italy, and Portugal are back on track.
- Gold will hit $5,000 an ounce. The most prominent of the gold bugs was Peter Schiff, CEO of Euro Pacific Capital. Gold notes that in December 2009, Schiff said it wouldn’t surprise him if gold “hit $5,000 in the next couple of years.” Gold eclipsed $1,900 in September 2011, but it’s been downhill ever since.
- The United States will suffer hyperinflation. Writes Gold, “This was the single worst prediction of the past five years.” Marc Faber, the Swiss-born pundit who publishes the aptly named “Gloom Boom & Doom Report,” was a leading proponent of this mistaken view. The latest annual inflation rate for the United States is just 1.3% through the 12 months ended November 2014, as published by the U.S. Government on December 17, 2014.
Experts can be fantastically wrong about stocks, too. Take Whitney Tilson, who graduated magna cum laude from Harvard and then earned his MBA with high honors from Harvard Business School. The founder and managing partner of Kase Capital Management writes for Forbes, Kiplinger’s, and the Financial Times and also appears regularly on Bloomberg TV and the Fox Business Network. With those impressive credentials, you might be surprised to read what he wrote about Google’s IPO almost a decade ago:
“Think about it. What are the odds that it is the leading search engine in five years (much less 20)? 50/50 at best, I suspect, and I’d wager that odds are at least 90% that its profit margins and growth rate will be materially lower five years from now. Yet investors appear ready to value this company at as much as $36 billion, nearly 200 times trailing earnings! Google with the same market cap of McDonald’s (a stock I own)?! HA! I believe that it is virtually certain that Google’s stock will be highly disappointing to investors foolish enough to participate in its overhyped offering—you can hold me to that.”
For the record, Google (GOOG) went public at $85 and currently trades near $534 after a 2-for-1 stock split in 2014 when Google issued Class C shares.
Naturally, faulty predictions are not confined to the investing world. Consider these:
- “A rocket will never be able to leave the Earth’s atmosphere.” (New York Times, 1936)
- “If excessive smoking actually plays a role in the production of lung cancer, it seems to be a minor one.” (W.C. Heuper, National Cancer Institute, 1954)
- “It’ll be gone by June.” (Variety Magazine on rock n’ roll, 1955)
- “Televisions won’t last because people will soon get tired of staring at a plywood box every night.” (Darryl Zanuck , movie producer, 20th Century Fox, 1946)
- “When the Paris Exhibition [of 1878] closes, electric light will close with it and no more will be heard of it.” (Oxford Professor Erasmus Wilson)
- “No one will pay good money to get to Berlin from Potsdam in one hour when he can ride his horse there in one day for free.” (King William I of Prussia, 1864)
If you’re interested in more predictions, 25 Predictions that Didn’t Come True is a quick, entertaining read. In fact, I suggest reading pieces like this and focusing on your own financial situation rather than wasting time reading and reacting to the flurry of market predictions for 2015. As I always say, changes to your investments should never be reactions to magazine headlines or market events, but should be prompted by changes in your own life. And now is a great time to reflect on last year and to plan for the years ahead.