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The Stupidity of Predictions and Why We Love Them

Behavioral psychologists know humans are OK being ignorant – we just hate being deprived of information.  Big Media uses this to drive clicks and ratings.  Which of the following headlines will make you want to read more?

  • Woman loses 10 lbs by making this small change to her daily routine.
  • Woman loses 10 lbs by not eating before bed.

Just who is this woman?  Why do we care about some random person?  There are 7.5 billion of us.  What’s so special about this one person?

We had no idea this woman existed.  Viva ignorance!  She lost 10 lbs.  Lots of people have lost 10 lbs.  But to tease us by not giving us the complete story?  We want…no…we MUST click on the first story to find out how she did it.

We just love information.  We crave it.  And just like Big Media uses it so do the talking heads of the investment world.  Which of the following headlines will make you want to read more?

  • Missing out on this one thing will cause you to miss a 30% jump in the S&P 500.
  • Mild improvement in economic data a positive indicator for equity prices.

The carnival barkers and snake oil salespeople are out in full force at the beginning of each year.  They’re all too happy to share their stock market forecasts with us.  Do they ever go back and tell us how wrong they’ve been in the past?

Consider two popular predictions from the start of 2017:

  • A Trump presidency will be a disaster for the stock market.
  • Interest rate increases will put downward pressure on bond prices.

How’d that work out?

Stock market disaster?  I suppose we were forced to endure a painful 25.1% increase in the DJIA and 19.4% increase in the S&P 500.  Disaster indeed.

Long-term bonds (which are highly sensitive to interest rate changes) were pressured alright…pressured into a 6.7% increase (as measured by the Vanguard Long-Term Bond Index).

But here’s the rub:  we don’t care.  Year after year dope after dope spouts BS upon BS and we listen.  They know we’re attracted to big, shiny things.  They give us what we want.  Shame on us for demanding it.

The start of the new year is a great time to fight back.  We’re already inundated with the latest and greatest predictions.  “Experts” are busy calling the top of the market.  We don’t have to listen.

Sure, one of these folks will be right…and by right we mean prove the broken clock theory.  Nonetheless they’ll be celebrated.  They’ll have their name in lights.  Yet while the focus will be on the “brilliance” of their call no one will focus on how much money was lost in prior years when this newly-minted genius was wrong – very wrong – over and over and over.

In baseball parlance these folks swing for the fences each time they’re at the plate.  We’ll celebrate each spectacular home run and look away at how often they strike out.  Wouldn’t it be better to try for singles and doubles and a higher on-base percentage?  Food for thought in constructing an investment strategy.

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