Are Forecasts Useful?
Photo by Craig Whitehead on Unsplash
We are, of course, talking about forecasts related to the markets and economy.
Are they actually useful? Or do they get in the way if we pay too much attention to them?
Let’s take a quick look.
Useful or useless?
According to investing legends Warren Buffett and Charlie Munger, short-term forecasts aren’t useful in the least, in fact, the word "useless" may even be generous:
“Charlie and I plead ignorance and firmly believe that near-term economic and market forecasts are worse than useless.” - Warren Buffett
Hmm, "worse than useless". That’s interesting.
What could go wrong?
I would argue that predictions and forecasts about what the markets are going to do are more a source of risk rather than a tool to help you avoid risk.
Why?
It’s because if they cause you to invest differently, you could miss out on some of the best days/years of the stock market. Missing out on those returns increases the risk that you won’t meet your investment goals and that your money may not last as long as you’d like.
I’ve seen many examples of this over the years, with people selling their stocks because the market was “too high” or was “about to crash”. One of the problems of taking this type of approach is that you have to time things right twice: First, when to sell. Second, when to buy back in. It usually ends poorly.
So why do we pay attention to these forecasts?
If you don’t pay attention to them, atta kid.
If you do, maybe this will be helpful.
Are forecasters accurate?
Think back to last year. It seemed everyone was sure that the stock market would continue to go down like it did in 2022, that we’d experience a recession, that inflation would continue to be terrible, etc.
And here we are, with none of those things having happened in 2023.
This isn’t new. It turns out economists and market prognosticators have a pretty dismal record of forecasting. For example, the titles of these Cato Institute articles are kind of funny:
Economists Can’t Forecast (from 2022)
Macroeconomic Forecasting Seems Pretty Hopeless (from 2019)
Economists Fail at Forecasting and Micromanaging (from 2018)
What will happen this year? Who knows! But that doesn’t keep people from making predictions.
None of this is to say forecasters are evil. After all, forecasting is hard. Economies are incredibly complex systems. And then we get unpredictable, unprecedented events that seem to happen regularly and can change everything.
What to do?
Add it all up, and I think it’s best to just stay clear of these forecasts. Or, go ahead and look at them (if you must), but don’t take any action based on them.
I read a lot about the economy, and I think hearing experts' thoughts about what's coming can be interesting. But I don't think we should be making changes to our long-term investment strategy based on short-term guesses about what's going to happen.
Here are a few more nuggets of wisdom from Warren Buffett:
"The only value of stock forecasters is to make fortune tellers look good." – Warren Buffett
“Market forecasters will fill your ears but never fill your wallet.” – Warren Buffett
Keep these things in mind the next time you hear about how the stock market is going to tank, or take off, or whatever else.