'Tis the season of Financial Pornography. By financial pornography I mean the short of highly speculative, highly exciting, short term financial predictions that dominate the media at this time of the year. It is important to understand that predictions simply don't work. To demonstrate the folly of trying to make short term predictions, and invest according to these predictions, I have included evidence from four different sources.
Exhibit A: ABC Midday News Forecasts. The ABC had a number of experts make predictions for the Australian stock exchange for the year of 2006. The predictions for the ending value of the Australian stock exchange ranged from 4,400 points to 5,200 points. The Australian stock market ended the year at 5,670 points (ASX 200 index). The closest forecaster was more than 9% away from the actual result. Hardly a forecast, more of a guess, I would suggest.
Exhibit B: Australian Financial Review. The Australian Financial Review is Australia's pre-eminent financial newspaper, by some margin. In June this year Tim Findlay ran an article entitled, 'Brace Yourself, the Bull Run is Over, say Technical Experts'. The crux of the story was an interview with a 'Professional Technical Trader and Chief Executive of Market Newsletter Alter Trader'. His forecasts were for markets to fall to 4,000 points after reaching a maximum of 5,250 in June. Clearly he was wrong.
Exhibit C: Australian Fund Managers Forecasting 2007. Straight from a financial pornography article are this year's forecasts from four experts who manage money for a living. The forecasts vary so much, that one of them is bound to be correct, with the other wrong. The forecasts range from optimistic 'Strong 2007' to pessimistic 'Tougher Year' with a bit of moderation 'Strong 2007 with a Bit of Caution' thrown in. Clearly there is no consensus forecast. This also shows the problems with forecasting - get enough forecasts and someone is bound to be right just through dumb luck!
Exhibit D: The Most Famous Failed Forecast of 'The Death of Equities'. In 1979 Business Week, a US publication, was amongst the most famous financial publications. They made the extraordinary claim that equities (shares) were no longer a relevant investment. Before looking at the article, let's take a peak at the ending. Since 1979 US shares have experienced an unprecedented boom. Even the market collapse of 1987 and 2001 could not stop this from being a period of well above average returns from the US stockmarket. It was a great time to own US shares. However, at the start of this period Business Week had said that share ownership was dead. Here are some quotes from the article:
"Further, this "death of equity" can no longer be seen as something a stock market rally-
-however strong--will check. It has persisted for
more than 10 years through market rallies, business cycles, recession,
The problem is not merely that there are 7 million fewer shareholders
than there were in 1970. Younger investors [Baby Boomers?], in
particular, are avoiding stocks. Between 1970 and 1975, the number of
investors declined in every age group but one: individuals 65 and
older. While the number of investors under 65 dropped by about 25%,
the number of investors over 65 jumped by more than 30%. Only the
elderly who have not understood the changes in the nation's financial
markets, or who are unable to adjust to them, are sticking with
The simple reality of how markets work is that we cannot forecast market movements.
Therefore this should not be part of our investment strategy. Instead, the focus must
be on building a sensible asset allocation, exposing a portfolio to a variety of asset
classes - and stick with it in the long term. And don't get distracted by worthless