Hervé Jacques has provided a guest post on the accuracy of guru prognostications. Here’s Hervé’s bio:
Hervé is a veteran of 30-year of market activity on the official sector side (central banks, International Financial Organizations) with first hand experience of FX and fixed income markets. He is now consulting for official and private institutions, targeting International financial organizations, sovereign wealth funds, central banks, commercial and investment banks, hedge funds.
In parallel to his professional career, he has a successful track record as a personal investor in stocks, bonds and commodities over several decades.
His market experience from an unusual perspective (the nexus between policy making and investors/traders) gives him unparalleled insight into the post-crisis world of capital markets.
Hervé Jacques on Guru Calls: Better lucky than smart?:
I came across this today, by accident. Check the date. Yes, it’s 2009.
Makes you modest, doesn’t it? That was back in May 2009. So David got it almost exactly right, month-wise. He was just a year early, as the market didn’t peak until April 23rd, 2010, so about 12 months later. The S&P500 went all the way from 920 to 1217 during those 12 months.
And this was coming from one of the (rightfully) most respected Wall Street voices, at the top of his career, crowning many years of leading presence at Merrill on his valedictorian interview.
Not picking on him here: there are dozens of examples of such calls ending way out of the ballpark, starting with quite a few of mine…
In 2001, the IMF did a 63 country-study on how well economists predicted recessions. The punch line of the result?
“The record of failure to predict recessions is virtually unblemished.”
Goes to show that both the economy as well as Mr. Market do as they please, no matter how intricate the research, how strong the gut feeling and how extensive the experience of whoever places calls, especially as regards the future of stock prices.
David’s point was right, mind you. I would subscribe even today to everything he said, on the fundamentals.
Nevertheless, the “animal spirits”, “market sentiment”, “investor psychology” or whatever you call it meant that Mr. Market would keep going strong for another year, despite all the appropriately highlighted issues.
So where does that leave us? Taking cheap shots at highly respected gurus? Nope.
The lesson is that no matter how authorized the voices, whatever they come up with is one of the potential “states of the world” that will materialize. There is this somewhat sarcastic saying that “promises only commit those that receive them”. I think it applies to forecasting as well.
Any forecast, no matter how carefully crafted, is a probability. Nothing more than that. Which explains, by the way, why we get so many different forecasts, based on so many different expectations, which make the market that superior voting and weighing machine described by Ben Graham.
So next time we read some intricately motivated forecast from a star Wall Street authority, let’s keep in mind that this is just as much as the human mind-at its best? -can conceive, but that reality will result of the competing expectations of millions of other “votes”.
Not necessarily better-informed “votes”, by the way. Which means that the outcome might be less “efficient” than the most carefully forecasted one. Being smart does not always lead to riches, as “the market can stay inefficient longer than you can stay solvent”, as we know.
So, away from philosophy, what does that mean in real trading life?
The practical consequence is that, no matter how strong the gut feeling, how grounded the analytics and how big the firepower backing it, any market position is a bet that needs to be backed by a stop-loss (“risk management”).
Any such position is only based on the existing information (public or private).
Therefore two things can derail the plans: new information (potentially “black swans”, but even more mundane events); and an unexpected reaction of other players (“Mr. Market”) to the existing information. That’s more than enough to mess up the best plans.
As my mom used to say: “Better lucky than smart”.