It’s Difficult to Make Predictions, Especially About the Future

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It is difficult to make predictions, especially about the future.

Attributed to many people

Susan Weiner has an interesting piece as her blog on Investment Writing called Are financial predictions too risky for investment commentary writers? I would say the answer is:

  • Yes, and
  • No, because you can’t avoid them if you are writing about investing

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Why You Should Avoid Making Predictions

My leading reason for avoiding making predictions is that when you are wrong, and someone loses a lot of money, he gets really annoyed. I can’t say that I blame them much.

Now, I might do it more if I got praise equal to the amount of annoyance. But my experience from my RealMoney days was for every bit of praise that I would get from a correct prediction, I would get 10 bits of criticism for one that I got wrong. That’s not much different in a way from reviews you read on the web for restaurants, hotels, service companies, etc., because people get greater motivation to write when bad service is delivered rather than good.

 It’s Difficult to Make Predictions, Especially About the future Why You Can’t Avoid Making Predictions

We can talk about the past, present, and the future. We know the past reasonably well. The present is fuzzy. We know the future not at all — we can only make guesses. Those guesses might be educated guesses, but they are still guesses.

You could spend all your time writing about the past, but readers would ask how that can benefit them now. Logically, they could ask “If this past situation had the result you mentioned, can I expect the same thing in this current situation that seems a lot like it?” It’s a fair question, and if you don’t answer it, you might find that your readers go elsewhere. They’d rather risk being burned than not get an opinion on some issue that they care about.

You could just report on the present. Some of that is useful, like hearing color commentary at a sports game. The same set of questions could come to you, like: “The market has been hitting new highs. Does that mean it will hit higher highs, or is it time to take some risk assets off of the table?” Another fair question, and readers would like an opinion.

As an aside, when I began studying nonlinear modeling, it was noted by many that nonlinear models don’t predict well. One academic decided to take the bull by the horns, and wrote a paper that was entitled something like, “If Nonlinear Models Can’t Predict Well, Why Should We Bother With Them?” One possible answer would be that most models don’t predict well, but that’s too discouraging for most readers.

The thing is, readers have their concerns about the future, and they want advice. Many would rather have a false certainty than a nuanced set of possibilities. We can’t do anything for them — they are fodder for the charlatans.

My answer for my writing is to try to be humble about the possibilities, and write things that explain thought processes rather than conclusions.

“Give a man a fish and he eats for a day. Teach a man to fish and he eats for a lifetime.”

— Old Proverb

The trouble is, we can’t even give people easy investment ideas that will always work. We can try to explain how to think about the question, and the possible scenarios that could result, and how likely they are. Giving people the building blocks of investment knowledge is more valuable than handing out tips. The building blocks have been tested, and work most of the time, but they take work to deploy. Tips are uncertain, but neophytes love them, partly because they take almost no effort to implement.

Finally, be happy about whatever audience you get. Largely, you will get the audience you deserve, and the criticism that goes along with it. Just be careful, and take a page from Hippocrates that resembles the concept of margin of safety:

First do no harm.

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About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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