The Next Twenty Percent

 

“If you desire a ride to Baghdad, here is a magic carpet; if you desire your enemy dead, here is a magic doll; if you desire unlimited riches, here is a forecast of interest rates.” – Deirdre McCloskey

Will the next $2,618,907,150,799 be added to or removed from the U.S. stock market? Nobody would answer such a ridiculous question, and yet, there are so many who wouldn’t think twice to opine on whether the next twenty percent ($2.6 trillion) move for U.S. stocks is up or down.

Of the 394 one-year twenty percent moves since 1926, 336 were positive and 58 were negative. In other words, historically, U.S. stocks were nearly six times more likely to be up twenty percent one year later than they were to be down twenty percent. You can see in the chart below there’s far more green than there is red.

20%

But calls for a bear market are no less silly than calls for a bull market. Historically, stocks were twice as likely to not be up twenty percent one year later than they were to be up twenty percent. I know what you’re thinking and I agree, there’s no reason that what happened in the past will repeat in the future. However, the chances that someone will develop an ability to see the future will continue to hover around zero. And yet, so many are comfortable making forecasts with their own portfolio while others are foolish enough to do so in the public eye. The biggest problem with making public predictions- of which there are plenty to choose from- is that the more times you say something the less likely you are to change your mind.

So what would compel somebody to do something when the odds of success are so small? Because it only takes one “good call” for someone to make a name for themself. This sort of thing is seen on financial television every single day:

“Now we welcome to the show John Forecaster who said last month when Apple was at $90 that it would head back towards $110. Today with the stock trading at $109, John, where do you see Apple going from here?”

Warren Buffett once said “forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.” I couldn’t agree more, these people were put on this earth to make day traders look wise.

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