Don’t waste time with financial forecasts!

Don’t waste time with financial forecasts!

Who hasn’t heard of the well-known pundits and economists who forecast economic growth to the second decimal place? Just recently, a report from Goldman Sachs landed on my desk in which the economists adjusted their growth estimate for China next year from 5.6% to 5.2%. Really? Anyone who knows what the data quality in China is like can only laugh at such forecasts.

But bank advisors, customers and other financial experts are glued to the lips of these augurs and want to know which country is growing faster, which is slower and where a recession is looming. With a serious look, the central bankers then explain that inflation is only temporarily high, that growth is accelerating or that unemployment will fall to 2.1% by the end of the year. The same central bankers who did not see the worst real estate crisis of the century coming.

The situation is even worse when it comes to stock market forecasts. On October 14, 1929, at the end of a decade of rapid growth, the most influential and brilliant economist of the time, Irving Fisher, said the following: “Share prices have, it seems, reached a permanently high level”. As we know, things turned out differently. In the just over four weeks that followed, the Dow Jones Industrial plummeted by over 40 % and by the summer of 1932 had lost almost 90 %. A permanently high plateau, my ass.

Or perhaps you remember the book “Dow 36,000”, which was published in 1999? In it, the authors argue that the Dow is undervalued and will rise from around 10,500 to 36,000 points in the next three to five years. Now, on November 1, 2021, it has finally managed to surpass this mark. With a delay of a mere 17 years!

I admit that not all predictions are so spectacularly wrong – but unfortunately they are no more reliable than a coin toss. If even professionals like smart economists, central bankers and highly paid analysts with the most modern models and the best data can’t make reliable forecasts, how can you or I?

Secondly: What would you have done if you had known in February 2020 that the stock markets would crash because of coronavirus? Would you have sold all your shares? Pretty sure. But would you have had the courage to get back in in the same year? If not, you would be annoyed today, because the world share index is already higher than it was before the pandemic broke out.

So even if you make excellent forecasts, that doesn’t guarantee success on the stock market. That’s why I agree with the legendary investor Peter Lynch, who once said:

If you spend more than 13 minutes a year analyzing economic and market forecasts, you have wasted ten minutes.

But the good news is that such exercises are not necessary for successful investing. If you invest in solid, quality companies, you will firstly have more free time and secondly will almost certainly perform better in the long term. Because the decisive factor is not “timing the market”, but “time in the market”.

With this in mind: All the best!

Yours, Mark Stock©