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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