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The Failure of Market Predictions – Part 1

13 January 2017

Headlines. They are the first thing our eyes are drawn to, as they just scream for our attention. And 2016 was a perfect example of why we should never read into headlines or let our emotions drive our decision making.

In Jan/Feb 2016, as the stock market was correcting in earnest, market pundits and economists had all but proclaimed the end of the current bull market. Citing figures such as high debt, the devaluation of the Chinese currency and the end of oil, many urged investors to run away from stocks.

Even well known “hedgies” like Carl Icahn and Stanley Druckenmiller sounded the death knell for stocks midway through 2016. These billionaires, with all their wealth, time and money invested in the stock market should and would know something more than average Joe Investor, shouldn’t they?

As stocks ended 2016 on a high, I wonder how all these forecasters, economists, strategists and market “experts” felt. Foolish? Sheepish? Hardly. They merely revised, edited, removed their earlier predictions and crawled back into the woodwork.

Why do experts get it so wrong? For one, investors should ask themselves – what do the experts gain from making such big bombastic statements? Perhaps they have a hidden agenda and have built up positions contrary to what they are saying. But the likely answer is that the world is so awash with such financial “talents” that the pressure to stand out is immense. What better way to get your statement reported than saying something attention-seeking and headline-grabbing? After all, if one predicts a bear market every year for the next 10 years, surely it will happen sooner or later?

What is the best way to invest, then? The optimal risk/return reward any investor can achieve is to hold a low-cost portfolio of diversified global equities and bonds. Because when it comes to predicting and forecasting, we are no better than “A BLINDFOLDED monkey throwing darts at a newspaper’s financial pages,” wrote Burton Malkiel in his book “A Random Walk Down Wall Street”.

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GYC Perspectives

Markets are often irrational. Even among experts, forecasting does not consistently work. We instead believe in Evidence-Based Investing (EBI), which uses decades of empirical data and the greatest ideas in financial science to optimise investment outcomes. No market predictions, no forecasts, no emotions. All those things rely on gut-feel and intuition that cannot be consistently replicated.

Here, we share with you the evidence on why EBI works and why forecasting doesn't, as well as articles on topics such as behavioural finance to help you become better investors. New here? You can start with this introduction to EBI. Happy reading!

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