“Sixty Percent Of The Time, It Works Every Time”

You may recognize the quote in the title from the movie Anchorman.  If not, here is the clip to refresh your memory:

This can be a lot like stock pickers, pundits and TV personalities.  Except the percentage of the time they are right are usually way under 60%.  A man like Marc Faber fits it to this camp.  For some reason he continues to get TV time with headlines like this one:  Marc Faber: S&P is set to crash 50%, giving back 5 years of gains.  At first blush, this sounds pretty scary.  That's the main reason CNBC is publishing it.  They know that fear sells and you are much more likely to watch a clip about a major market crash than something much more useful like diversification, cost management or tax minimization.  Unfortunately, no one seems to fact check their contributors actual results (who really cares about the data anyways?).  Here is a great chart showing Marc Faber's record over the last 7 years:

faber-timeline

He seems to predict a market crash as often as a meteorologist predicts rain.  Of course, at some point he'll be right.  The only problem is that if you continue to follow his advice, you'll most likely be broke before this happens.  This post is not meant to insult Marc Faber, but to illustrate the folly of predictions.  This is just another example to run (not walk) away from anyone who is using prediction for the basis of advice.  It may seem like making changes to your portfolio based on the prediction of what stock is going to do well, or whether the market is high or low makes sense, but nothing could be further from the truth.  Base your investment strategy on evidence and logic and all of this stuff just becomes noise.

The Value Of Predictions

As we close out 2015, we find ourselves in one of the most comical parts of the year in finance.  The time to make predictions for 2016. Why is this comical?  Because Wall Street strategists are usually spectacularly wrong, yet investors still seem mesmerized by what they will say.  Wall Street strategists are not dumb.  There is no career risk in saying that the S&P 500 is going to go up 8 or 10% in a year.  Since that is the long-term average, you aren't really going out on a limb making this prediction.  No one is going to crucify you for it.  While you won't lose your job, you almost certainly won't be right.  In a recent article on MarketWatch 10 leading analysts are predicting a 6% gain for the S&P 500 next year.  Last year, these same analysts were looking for approximately 10%.  In fact, when you go back and look at analyst predictions, you will always see they predict returns in the upcoming year to be around 6 to 10%.  Let's take a look at the distribution of returns of the S&P 500 over the last 89 years to see what actually tends to happen:

Return distribution

We see that returns will be between 0 to 10% less than 15% of the time!  Here are some staggering statistics to consider as you ponder the validity of predictions:

  • Annual returns between 10 to 20% have been 46% more likely than annual returns between 0 and 10%
  • You've had the same odds of annual returns being between -10 and 0% versus 0 and 10%
  • It has been slightly better odds of generating annual returns between 30 and 40% versus 0 and 10%
  • 58% of all years measured (1926-2014) saw returns greater than 10%
  • 27% of all years measured (1926-2014) experienced negative returns

Rarely are returns average over a one-year period.  They have a tendency to be either much higher or lower than what analysts predict.  Given that analysts are probably right around 15% of the time (based on the frequency of returns above) it is hard to comprehend the value these predictions create for investors.  Maybe it's time to start realizing that the value of predictions is not for you, but the Wall Street firms (by selling you products) and the media (by you clicking on articles).  

Finally, A Financial Journalist Tells The Truth

If you are looking for a good journalist to read, you can't get any better than Jason Zweig of the Wall Street Journal.  One of the complaints I have of journalists is that it is not in their best interest to tell the truth when it comes to personal finance.  The reason- it's too boring.  No one would ever continue reading their articles.  Well, it looks like I may have gotten it wrong.  Jason has a great quote about how he approaches the subjects he is going to write about:

"My job," Sweig says, "is to write the exact same thing 50-100 times a year in such a way that my editors and my readers will never think I'm repeating myself."  

Brilliant.  Good financial advice is boring.  Boring doesn't sell newspapers.  I love the fact that Zweig recognizes this but still attempts to tell the same story over and over again.  But won't repeating the same concepts get old?  Won't you lose readers?  Zweig addresses this:

"There are three ways to get paid for your words:

  1. Lie to people that want to be lied to, and you'll get rich
  2. Tell the truth to those who want the truth, and you'll make a living
  3. Tell the truth to those who want to be lied to, and you'll go broke"

This concept not only applies to journalism.  Financial advice follows these same rules.  At Greenspring, there is a reason we don't sell certain products that seemingly offer high returns with low risk (variable annuities, private REITs, etc).  While we might be able to make more money (ala #1 above) by selling something to people who want to believe there are free lunches, we want to be able to make a difference in our clients lives and feel good about the advice we are giving.  Our success has not only come from telling people the hard truth, but finding people that are willing to accept the truth.  

Why The Financial Media Will Never Tell The Truth

I've been thinking about how detrimental the financial news media can be to investors.  I can't tell you how many times I've had conversations with clients about things they read in the media that have no bearing on their long-term financial plan.  What do you think is going to happen in Greece, I'm concerned what rising interest rates could do to my emerging markets stocks, how do you think China's slowdown will impact oil prices?  These are just some of the questions I've received from clients after reading an article on Yahoo or the Wall Street Journal. But be honest with yourself…if the media told the truth, would you read it?  Here is what the article headlines would look like if they told the truth:

  • A bunch of stuff happened today that has nothing to do with your long-term future.  Stick with your plan
  • Remain diversified.  
  • Remember to keep costs low in your portfolio
  • Don't pay attention to the day-to-day noise happening in the world.  Remained disciplined in your investment plan
  • Don't trade very often

If those aren't the most boring news headlines, I'm not sure what are.  But they are all truths that people should be following.  If the financial media actually told the truth you would do one of two things:

  1. You'd get bored and stop reading those articles
  2. You'd get their point and stop reading those articles

In both cases, you stop reading their articles which is bad business for them.  Remember, the media generates their revenue from readership and eyeballs.  The only way to keep people reading is to continue to publish spectuacular stories.  Journalists are not here to advise you.  Please make sure you remember this the next time you are thinking about making a change to your portfolio after reading a story about the markets or the economy.

Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.