To be clear, this article doesn’t contain any stock market predictions. Rather, the point of the article is in its title. This time of year, you’ll see many articles with similar titles and segments in the financial media with comparable themes. As Josh Brown points out in his most recent book, Clash of the Financial Pundits, this concept is one of the most widely used tricks among market forecasters.
Making a stock market prediction that comes true often turns into a gold mine for the prognosticator. How often do you see a guest that predicted the 2008 crash, or even the tech bubble bursting in 2000, as a guest on CNBC or CNN? The financial media loves having guests who were once right on their shows because they bring viewers. Even if the same analyst predicted another crash every year between 2009 and 2014 and was completely wrong each time, people still listen to their opinion on the market’s future because they are promoted as the genius who accurately predicted the big crash. Of course, being known as the person who predicted the 2008 market crash is good for business, and these people will milk that singular accurate forecast for years.
So how do people who earn a living guessing the direction of the market maintain their credibility even though they make many more inaccurate predictions than forecasts that actually come true? They write articles or appear on television segments with titles such as “10 Outrageous Market Forecasts” or “Potential Surprises for 2015.” By making predictions through this medium, if the guesses don’t work out the prognosticator can claim they were all in good fun or potential surprises, not expectations. However, if the predictions come to fruition the forecaster can claim he got everything right and benefit from years of being known as the analyst who accurately predicted the future. Essentially, making predictions this way creates a no-lose scenario for the author.
As Mr. Brown makes clear, the lesson is that clever market pundits couch their predictions in outrageousness. The public will forgive inaccuracy masked as wackiness while we’ll hypocritically be impressed by what looks like foresight, even if it arrives packaged as a surprise.
Another trick that market forecasters employ is the art of disguising predictions as suggestions. For example, a prognosticator might say “The Fed should cut interest rates by 25 basis points.” Of course, if the Fed does cut rates, the forecaster can say it is exactly what he told investors to expect. Meanwhile, if interest rates aren’t reduced, the pundit can always say the economy would have been much better off if the Fed had done as he suggested and cut rates.
Perhaps the most blatant trick is forecasters saying something “could” happen. This morning I heard a pundit on CNBC say that Yelp “could” go up 60% in 2015. Of course, Yelp “could” also go down 60% in 2015 and if it does, the pundit will take no blame for pointing investors in the wrong direction because he only pointed out that it was possible Yelp could have a good year. On the other hand, if Yelp does well in 2015 the forecaster will be promoted as the sage who predicted the big move.
Virtually every market analyst who made an accurate prediction has declared twice as many prophesies that didn’t come true. However, they’ve learned and utilized tricks that enable them to take credit for the minority of forecasts that become correct while avoiding responsibility for the majority of predictions that are inaccurate. Watch for people who use these techniques and give them no credence.