Investing in 2012: Get ahead of forecaster folly
By Barry Ritholtz,
The new year has arrived, and so investors are inundated with all manner of lists: Best and worst stocks for 2012, forecasts of where the economy is going, favorite investments for the year and more.
What’s an investor to do? You should start by ignoring those lists. Let’s conduct a little experiment to demonstrate why: Do a quick Google search for “where to invest in 2011.” I read through the first dozen or so. For the most part, the performance was pretty awful. Before the excuse-making starts — 2011 was an unusual year, the ECB/Fed intervened, etc. — let me clue you in to this fact: Forecasters are pretty awful every year.
Whenever I see one of those “Buy this now for the new year” columns, I diary them in my calendar or use the free Web site Followupthen.com. A year later, I look back at these recommendations and forecasts, and, for the most part, they’re terrible.
Because of this folly of forecasting, I try not to make many predictions. Whenever I am asked where the economy is going, who is going to win that year’s elections or what the markets are going to do, I steal a trick from the weatherman: Always couch your forecasts in probabilities. That way, when I am wrong — and anyone who pretends to know what will happen in the future will frequently be wrong — at least I can declare the outcome was an anticipated probability.
“As we stated last January, there was a 10 percent chance that the Federal Reserve’s Hobbensobbers were going to be trounced by the bond market’s Rebblesacks — and that’s exactly what happened!”
It’s a great cheat to avoid saying silly things in public that could come back to haunt you.
These are my 10 forecasts as to what the forecasters will be forecasting for 2012:
1 Stocks will trounce bonds this year: We heard this one a lot in 2010; it turned out to be wildly wrong. Stocks were flat in 2011, while bonds gained about 13 percent. Indeed, turning conventional wisdom on its head, bonds have outperformed stocks the past one, 10 and 30 years.
Hey, maybe stocks will beat bonds next year. If you keep making the same prediction, eventually it will come true.
2 Housing has bottomed: A perennial favorite from the usual suspects, who have been consistently, insistently and persistently wrong about this since residential real estate peaked in mid-2006. As the most recent Case-Shiller data show, home prices fell another 3 to 4 percent in 2011. From prices that remain too high to an excess of inventory to slow household formation, there are many reasons the bottom has not yet occurred.
3 Election forecasts: In politics, six months is a lifetime. Just look at how often the poll leader has shifted in the Republican nomination race over the past six months. Making a forecast 11 months out about politics is sheer folly. But consider: Lots of people will make forecasts about who will win the primary, what the final tickets will look like, who needs to win which states to gain how many electoral votes. The sheer number of forecasts means that someone will, if only by chance, get it right.
4 Buy these 10 stocks: You must buy THESE 10 stocks — not those 10 stocks or even these 10 stocks, but THESE 10 stocks. Looking back at all of these lists, it is surprising more people didn’t get something right, if only by accident.
The question investors should be asking themselves is why am I buying stocks at all and not simply indexing? Answer: Makes for too short an article.
5 The economy is better than the data suggest: We see this over-optimistic discussion every year. It is consistently wrong. If anything, data about the economy tend to overstate growth, employment and sales while understating inflation.
There is a period when the economy is better than the data show it to be: At troughs, when a long downturn is reversing itself. Are we at that sort of a juncture? Considering it has been nearly three years since the market lows of March 2009, and 30 months after the recession ended in July 2009, that hardly seems to be the case. The economy was better than the data implied in mid-2009, not today.
6 The Apocalypse is coming! This is the over-pessimistic view. Yes, we know, the end is near. You tell us this year after year, and it is terribly tiresome. After the Apocalypse, you have full license to say “I told you so.” Until then, please go away.
7 Banks will come roaring back: My favorite terrible forecast for 2011 was “Buy the Banks” (NYSE: XLF); a variant was “buy Bank of America” (NYSE: BAC). And just how well did that work out? The financial sector was among the worst performers of the S&P in 2011. In a year when markets were flat, financials fell 20 percent. As to Bank of America, it collapsed 60 percent, in percentage returns, the worst forecast of the year.
Every year some value managers come out pounding the table on whatever sector got beat up that year, regardless of the reasons for it. They are always sorry to learn that mean reversion is not tied to a calendar.
8 Hyperinflation: During the 2000s, we hardly heard forecasters say much about inflation. You might recall that during that decade, oil rallied from $20 to $147, foodstuffs skyrocketed, and education and health-care costs had double-digit annual gains.
Post-credit crisis, the economy has been in a deflationary mode. Asset prices are flat-to-negative, labor utilization is way below trend, and demand for goods and services remains soft. No matter how much money central banks print, these are not the factors that lead to Weimar Republic-like hyperinflation.
9 Buy gold: On a related note, the gold bugs got some comeuppance this year. As of mid-August, gold had gained more than 33 percent year to date (according to the gold-tracking ETF: NYSE: GLD). But the enthusiasm for the trade got way ahead of itself, and gold lost more than a quarter of its value, with GLD falling $46.59. After a spectacular decade of gains, the shiny yellow metal failed to achieve gains of even 10 percent in 2011 and was outperformed by bonds.
10 Buy emerging markets: Mulligan! This was another favorite forecast for 2011, and it was wildly wrong. China and Hong Kong were down 20 percent; India and Brazil were off by a third. The decoupling thesis never goes away — that despite the interconnected global economies, some regions will do well even when their biggest trading partners slide into recession.
The key thing you should remember when it comes to investing is that nobody truly knows what tomorrow will bring. Nobody. These predictions are, at best, educated guesses. Yesterday’s predictions are undone by tomorrow’s news. Circumstances change. New economic data are released. Unanticipated events unfold.
All good reasons to avoid forecasts altogether.