In economics, it is customary at the beginning of each year to make predictions for the remainder of the year. We have an unlimited need to foresee the future thus creating marvelous opportunities not only for charlatans and quacks but also for distinguished organizations such as central banks, the OECD, the IMF and more. Note, however, the statement by Niels Bohr that prediction is very difficult, especially about the future.
Monday Morning Millionaire followers don’t need us to predict what the market will do in 2018. An internet search for the term “Market Predictions” produces nearly 14,000,000 hits. However, we can contribute two insights. The first deals with the value of market predictions and their usefulness in making investment decisions. Let us first look at the most highly respected sources.
Elsevier publishes many high impact factor, peer-reviewed scholarly journals. One of these is the International Journal of Forecasting. Looking at its record of predictions, in 2001, Prakash Loungani, an economist from the International Monetary Fund stated: “The record of failure to predict recessions is virtually unblemished.” That performance continues.
In a more recent example, the Bank of England predicted economic catastrophe resulting from Brexit. That is nowhere near the case. Familiar territory for the bank; it failed to predict the 2008 crash, so obvious in hindsight.
A glaring example of unexpected predicting failure is that of Irving Fisher. Regarded by colleagues as one of the greatest American economists ever, he is mainly remembered today for stating just prior to the Wall Street Crash of 1929, that the stock market had reached “a permanently high plateau”.
We should read market predictions for amusement only.
Our second insight is that market history, unlike predictions, is quite another matter. It can be instructive. For example, it is a fact that a trend is more likely to continue than to reverse itself. But… trend reversal is one of the few absolute investing certainties.
So, how can we bank on this historic fact? When asked what the markets will do, the great depression era financier J. P. Morgan said: “They will fluctuate.” Investors can take advantage of that reliable prediction.
Given these facts, what does the future hold? What would the Monday Morning Millionaire do?