Turn on any financial news channel, and you'll see a parade of people proffering opinions on market direction, economic conditions, interest rates, corporate earnings and various other topics.
Most of these pundits are intelligent enough, and they seem to make sense. After all, if there is potential danger lurking in a central bank action or a change in commodity prices, don't you need to know about it? If a smart, knowledgeable person has advice on how to invest, based on forecasts or current events, shouldn't you act upon it?
For both questions, the answer is nearly always "no."
Just because a market forecaster has a platform on TV, the Internet or in traditional media, that doesn't mean his or her predictions are accurate.
CXO Advisory Group, a Manassas, Virginia, investment research firm, examined 6,582 predictions made by 68 market pundits between 1998 and 2012. It found that the average accuracy of all pundit data points was 47.4 percent. In other words, a little worse than your odds with a coin toss.
If a forecaster's call happens to be correct, he or she will be in demand as an expert. For instance, the track record of Nouriel Roubini, a New York University economics and business professor, has not been stellar, but he is a popular commentator on financial TV networks. In 2006, Roubini correctly predicted the burst of the housing bubble and subsequent stock market crash, although he timed the market debacle incorrectly.
Among other incorrect calls, he predicted that the U.S. government would nationalize banks amid a stock market decline in 2009. The Standard & Poor's 500 index returned 26 percent that year, and banks remain in the private sector. In March 2013, he said investors should expect a correction in the second half of the year. As it happened, the S&P 500 had a total return of 32 percent in 2013.
Roubini is just one example of a high-profile, frequent media commentator whose forecasts aren't necessarily correct. There are plenty like him.
With today's plethora of market-oriented TV channels, magazines, websites and newsletters, there's high demand for content. Analysts with almost any kind of view on the market are welcome. On TV, repeat guests tend to be people who have strong opinions on a topic like gold, and who are delighted to have a spirited argument with anyone who disagrees. Producers know these debates attract attention, so they continue to invite highly opinionated analysts to share their views.
It's not limited to TV. Popular speakers at investing conferences include people who perennially forecast market crashes, global economic collapse and incurable diseases sweeping the planet. Negative forecasts are crowd-pleasers, even when the pessimists are proven wrong, over and over.
As U.S. markets have rallied to all-time highs in recent months and years, it hasn't been difficult to find forecasters predicting imminent disaster.
"If I were to write an article or make a statement that was very negative about the future of the market, there's a probability that I'm going to be right because the market is so high," says Paul Merriman, president of the Merriman Financial Education Foundation, based in Bainbridge Island, Washington.
"If my prediction happens to be right, I'll be a hero, and I'll have something to market myself for the next 20 years. To be a gloom-and-doomer, to warn people about a coming catastrophic decline, is an easy sell," he says.
Although investors want to make money, they often gravitate to negative news about markets and economic conditions. "It's about what really drives us," Merriman says. "Our fear of losing money is greater than our desire to make money."
John Ameriks, principal at the Vanguard Group in Malvern, Pennsylvania, says fierce competition in the financial media often leads to outrageous predictions.
"All these media venues are business concerns, and they have to find a way to be noticed. There's a strong incentive to say something that causes you to look up at the screen as you're rolling your wheelie bag past gate 17," he says.
"There's an urgency to say something louder or be more noticeable than the next person, and it's an escalating game of trying to find the most inflammatory and incendiary thing you can get on the air," he adds.
Fresh off the dot-com market euphoria, some analysts made what were, in hindsight, overly confident and even naive predictions about market direction. The year 2000 saw the release of a book titled "Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market." The following year, another author released "Dow, 30,000 by 2008! Why It's Different This Time." It was a more modest prediction, but it came with a target date.
Looking in the rearview mirror, it's easy to laugh about those books. But at the time, respected asset managers and authors wrote positive book-jacket blurbs, and the books received some good reviews from readers.
Many investors take analyst forecasts seriously because they view prominent media personalities as having some authority.
"Financial media figures, like their counterparts in news and sports, do enjoy an air of authority with much of the viewing and reading audience," says Jeb Collier, communications specialist at BlueSky Wealth Advisors in New Bern, North Carolina.
But there's not necessarily any basis for that authority, other than the social proof that a person is a known spokesperson in the media.
"It's akin to America's fascination with celebrity or the British fascination with the royal family. In fact, the British have a perfect description for the talking heads on U.K. television: 'presenters.' As a firm, we believe the financial media in general is for educational purposes only," Collier says.
Many people also gravitate toward analysts whose views confirm their own. For example, if you think the stock market will collapse for some reason, and a TV talking head or newsletter writer articulates your view, you may take action based on that person's opinion.
That's potentially risky, Collier says. "People should remember that forecasting, by its very nature, is notoriously uncertain. Forecasting markets is like forecasting weather; someone will be right some of the time, and others will be wrong most of the time. Forecasts should be only one part of a robust investment research process," he says.
Ameriks says investors would be well served to view financial and economic forecasts as nothing more than entertainment. But they should also be aware of their own cognitive and emotional responses to these predictions.
"I don't want to suggest that people put their heads in the sand. People can get worked up about what goes on in the markets, and we all like to express our opinions," he says. "But we have to accept the fact that we are human beings, and we're going to react. Just be cognizant of those reactions and adopt mechanisms so you can make decisions that are in your best interest."
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