Written by Christopher Hanson
Paragon Park had a gaudy fortune telling machine in its arcade. It was called Grandma’s Prophesies and it looked like a heavily made up corpse laid out in an upright casket. But deposit fifty cents though and good old grandma sprung to life. Light bulb eyeballs lit up, the creaky head spun, and her fiberglass hands moved over a glowing crystal ball. The mystical music added to the experience along with the scents of fresh cotton candy and the Nantasket sea breeze. When grandma finished with her plexi glass enclosed gyrations, a fortune card was dispensed. The card was supposed contain to wisdom that only she could see.
Well, there were only predictions but no wisdom. Even in my young gullible mind I knew it was impossible to predict the future. Furthermore, the fortunes told were vague and relevant to just about anyone. How could a machine that only has money as an input come up with anything specific? Grandma simply had a stack of fortune cards and players simply received the next card in the stack. So, seeking Grandma’s advice was kind of like buying the Brooklyn Bridge fifty cents at a time.
Grandma wasn’t the only one lacking clear vision of the future. Wall Street analysts don’t have one either. Yet, every year, investment houses, banks and brokerage firms come out with stock market predictions. Then, the firms put some slickster in a crisp white shirt and nice Italian suit on cable TV to deliver the news. Since the analysts look much better than Grandma, people are tempted to believe them. But I warn you these analysts are more often than not wrong, they owe you nothing and they seldom offer apologies when time proves them wrong.
Let’s consider some forecasts for the S&P 500 at the beginning of 2015 and then compare this with actual year end data. My source of prediction is a great article by Myles Udland of www.businessinsider.com. He polled 13 top Wall Street analysts from the biggest names in the business. The most modest prediction was an S&P 500 of 2,100 while the most optimistic was 2,325. Now, for the actual results, please play a drumroll in your head instead of Grandma’s mystical music. By December 31, 2015 the S&P closed at 2,043.94. If you made a $100,000 investment January 1st it would have grown by about $1,400 including dividends by December 31st – not the $15,000 of the most optimistic prediction, or even the $4,000 of the least. They all failed.
If you focused on the short term and acted on the prediction of the gurus you have no recourse. You can try to call them to complain, but many layers of gatekeepers will prevent you from getting them on the phone. It is unlikely that someone took to the airwaves to admit their mistake. But, oh boy, if they were spot on you’d see a bunch on smug faces cramming the TV screen. We all know what they say about broken clocks.
Let’s look at things another way. If I could truly predict the stock market, the last thing I would need is a job at some monster institution. I’d keep my predictions to myself so no one else had this advantage. Then, I would purchase a bunch of highly leveraged investments, to magnify my winnings each year. Repeating this process, eventually I would be the richest man on earth. Even Grandma would seek out my advice. But, why isn’t it ever on the national news that some investment whiz kid became wealthy in this manner? It’s because this phenomenal person doesn’t exist. We all know it’s impossible. I haven’t been to The Mountain but I know it never existed at Paragon Park or on Wall Street.
The lesson here is that to reap the benefits of disciplined investing you must filter out a lot of noise. Think twice, maybe more, about moving your money around based on these predictions. You’re probably reacting to short term market conditions rather than focusing on your long term goals. There are also opportunity costs in play. You may be missing out on the rewards of long term trends. The long term trends possess much more predictability. The greatest investor of all time, Warren Buffett, once said, “A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting.” So review your goals, both short and long term, with a qualified advisor annually. It doesn’t take that much time and Grandma would be proud.
Chris Hanson is a CPA that specializes in financial planning at Oaktree Capital Partners in Easton. He earned his BBA at the Isenberg School of Management University of Massachusetts and an MBA at Babson College’s F. W. Olin Graduate School of Business