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Max's Investment World Stock Market Challenge

Beware of Predictions

Predictions are easy to make but difficult to fulfill. Take economic forecasts. Several hundred economists and the nation's top banks and brokerage companies routinely attempt to predict the future and are paid handsomely for it, even if they're wrong.

At the beginning of July 1995, for example, Goldman Sachs economist Edward McKlevey predicted in The Wall Street Journal that the 30-year Treasury Bond would yield 7.3 percent. Raymond Worseck of A.G. Edwards put it at 7.2 percent. Actually, the 62 economists as a group predicted that the bond would end 1995 at 6.6 percent. Well, guess what? It closed at about 6 percent, huge difference.

The economists didn't do much better when it came to the yen-dollar exchange rate. The group predicted that the dollar would fetch 89 yen when it actually fetched 103 yen at the end of 1995.

How about consumer inflation? Wrong again.

If economists, market strategists, stock analysts and other gurus on and off Wall Street were generally on target, these findings wouldn't be so bad. But the problem is that most of the time, these soothsayers are off the mark. In the previous Journal survey, taken in December 1994, the economists missed the sharp drop in interest rates and the appreciation of the yen.

What's the point here? First, don't place your bets on what the "experts" say. Second, if 62 of the best minds in America, working long hours and using computer models and research assistants by the dozen can't come close to figuring out the real numbers, do you think you can do any better?

The fact is that no one can predict the future, although no one is likely to give up trying.

The implications of the poll are even more frightening for lawmakers in Washington. If 62 economists can't come close to guessing what will happen in 6 months, how in the heck can the Congressional Budget Office or the Office of Management and Budget accurately predict economic growth in five years? Even if the White House and Congress agree on a budget-deficit plan, there's no way in the world of knowing whether economic conditions in a few years will help or impede its progress.

The best course of action for investors is to carefully study stocks, bonds and other assets in their portfolio and assume that long-term trends will continue. That is, stocks will outperform bonds by several percentage points, for example.

That doesn't mean that investors should necessarily stop reading the business pages of the paper. It's always interesting learning the views of others. But don't necessarily trade on them. Serious investors engage in what the medical profession calls watchful waiting. That is, they listen to other views, read the papers and watch their investments for signs of trouble but they do not act unless something is seriously amiss.

Bottom line: stick to your long-term investment plan regardless of pronouncements by the forecasters.

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