Financial forecasting is guesswork and a waste of time, according to a leading fund manager.
Ben Whitmore is fund manager at Jupiter Income Trust who has some scathing opinions about economists who try to predict how markets will move.
He starts with the remarks of renowned economist Ezra Solomon, who argued the only value of economic forecasts was to make astrology look respectable.
His opinions go downhill from there.
Even vast increases in computer power have not stemmed the flow of poor forecasts, he says.
Future is unpredictable
The evidence is American academic Phillip Tetlock’s book Expert Political Judgment. Tetlock scrutinises 80,000 economic predictions from 284 forecasters over two decades.
Tetlock’s opinion – expert predictions were not significantly better than those a ‘mindless, dart throwing chimp’ could make.
“The future is inherently unpredictable and if we made forecasts ourselves they’d surely be no better, which is why I don’t try,” said Whitmore.
“But why, then, do so many people persist in attempting to guess the unknowable? One plausible explanation is they don’t actually realise just how bad their predictions are.”
He cites other research by Tetlock which revealed that forecasters believed they were right more often than was so.
Hindsight bias
“This effect is known as ‘hindsight bias’. Or perhaps humans just find it too uncomfortable to admit they don’t know what the future holds? We crave certainty, and for many people a forecast seems the best way to provide this – regardless of eventual accuracy,” said Whitmore.
“Whatever the reason, in my view investors must realise that relying on forecasts, or even making their own, is not only a waste of time but can distract from real analysis and distort perceptions of risk.”
Whitmore utilises two screening strategies to help identify shares for his fund portfolio. The Graham & Dodd Screen examines average company earnings, while the Greenblatt Screen looks at average company earnings and return on operating assets.
“The only prediction I am prepared to make is that I believe the most lowly-valued stocks in the market have a better than average chance of outperforming over the long term. This has been statistically proven to have happened in the past and I believe this long-term relationship will hold into the future,” he said.
