When I first started studying the stock market and what makes it tick, I was always captivated by people who confidently predicted what would happen next. “The Dow will bottom at 16,000.” Or, “The market will return 9% over the next 12 months.”
I found those prognostications extremely compelling – mostly because I felt entirely inadequate to make those calls myself.
Questions swirled in my mind. How do they calculate that? What data are they using? Why can’t I seem to figure it out?
Whether it was in a newspaper article, a financial television show, or research report, seemingly intelligent people were divining a future that appeared murky to me.
But they were convincing.
They were convincing because their predictions were boldly stated. They were convincing because I didn’t have a clue how to begin forecasting such things myself. They were convincing because I was yearning for clarity about the future.
But I’ve learned something, and it’s especially true during tumultuous times, like today. What I have learned is that they’re all guessing.
Sure, these fortune-tellers may have clear rationale – and in many cases, hard data – to back up their predictions. But rationales don’t always play out and data can be tortured to tell any story the author wishes.
Even if a few of these fortune-tellers are right, it may be for the wrong reasons. And being right for the wrong reason is simply being lucky, not skilled.
What’s more, the individuals making a living off forecasting the future often make hundreds of predictions throughout the year. Some of them are bound to be right. Not surprisingly, those correct “calls” are the only predictions forecasters tout when they want to build their credibility. They conveniently fail to mention that 95% of their other predictions never came true.
Uncertainty is a constant in investing, just as in life. Predictions do not eliminate uncertainty; they simply define one possible scenario – of many – that could occur.
The best investors understand it is acceptable to not know what the future holds. They are no less intelligent for doing so. Rather than issuing predictions, they think in probabilities.
Probability is a useful tool because it forces us to recognize that multiple outcomes are possible.
The U.S. stock market finally saw some signs of life this past week, erasing a portion of its recent losses. Where does it go from here? That’s anyone’s guess. And there are plenty of guesses out there.
Over time, the stock market will do well. That simple truth is the only forecast investors really need.
In times like these, when the stock market is swinging wildly, it is natural to seek advice from “experts.” We all want to know what will happen next. The fact that so-called experts can spin a good story and tell it persuasively is enough to make many people believe them.
Just know this: Appearing on television or online for a major news outlet doesn’t make anyone an expert. Maybe they will be right. Maybe they will be wrong.
But they’re just guessing.