Why to Hate Stock Market Predictions and Forecasts

I don’t make many financial predictions and don’t make portfolio recommendations based on them. Yet, most financial and investment marketing these days seems to be based on predictions. Investors in general are captivated by predictions and spend a lot of time reading different forecasts and trying to determine which is right.

Using predictions is a mistake for several reasons. It’s hard to make an accurate prediction. Plus, you have to be right not only about the big picture prediction but also about how the markets will react and which investments to buy and sell. It’s not unusual for markets to have surprising responses to events. You also have to be right more than once. Investing based on a prediction means you’re betting your portfolio on one outcome and giving up diversification. If the prediction turns out to be true, at some point you have to change your portfolio to preserve your profits and take advantage of what comes next.

Here’s one person’s view of the three worst financial predictions in the last five years. There’s a lot of competition for the winners, so this is something we can argue about. I especially like the forecasts of hyperinflation as among the worst predictions.

There was a bubble in hyperinflation predictions in 2008/9 following the huge fiscal stimulus package in the USA and the supposed “monetization of the debt” which people still believe to this day due to misconceptions over quantitative easing.  Personally, I think the hyperinflation predictions have to rank among the very worst economic predictions of all-time because the reasoning was so misguided.

Those who predicted hyperinflation were not only entirely misinterpreting the debt de-leveraging, but were misinterpreting how the monetary system works at an operational level.