Larry Swedroe, the director of research for The BAM Alliance, a group 140 registered investment advisor firms, is not a big fan of market “gurus” who regularly make forecasts to provide fodder for the financial media.
He points to studies showing that no one is really accurate at short-term stock market predictions and says: “I have learned that there are only three types of market forecasters: those who don’t know where the market is going (count me among them); those who don’t know that they don’t know; and those who know that they don’t know, but get paid a lot of money to pretend they do.”
The problem with “market gurus”
Swedrow says the problem with these “gurus” is that they cause investors to make poor decisions. He argues that the market projections offered by these so-called financial market experts “worry investors and can lead them to abandon even well-thought-out financial plans, especially if they’re already concerned about the same issues being raised.”
He argues there are three main reasons people believe the forecasts of market gurus. One reason investors is the “all-too-human need to believe that someone out there can protect them from bad things.”
The field of behavioral finance offers a second possible explanation with the concept of confirmation bias. Confirmation bias means human beings search for, interpret or remember things in ways that tend to confirms our pre-existing beliefs.
That means if we are concerned about something, and someone forecasts a future similar to what we believe may happen, we are much more likely to act on that forecast than if we had not already held that belief.
Swedroe goes on to discuss how confirmation bias works together with prospect theory to make people panic and sell at the worst possible times. Prospect theory says that humans feel the pain of losses more than we experience the joy from an equal gain. That is why humans are prone as “myopic loss aversion” — counter-productive short-term thinking to avoid the possible pain of greater losses.
Swedroe shreds Marc Faber (Dr Doom)’s record
In his op-ed, Swedroe singles out Dr. Marc Faber as one such “guru.” He notes that Faber is a frequent guest on CNBC, and regularly appears in the financial media. According to Faber’s website, he is “an international investor known for his uncanny predictions of the stock market and futures markets around the world.” Faber is probably best known as the editor of the “Gloom, Boom & Doom Report”, and has prognosticated major market corrections on literally dozens of occasions. Any reasonable analysis of Faber’s market calls show that he has been wrong at least twice as often as he has been right.
Given the number of global hotspots recently, Faber has gone back to the well again. In late April 2015, Faber appeared on CNBC to tell investors that “U.S. stocks are due for a correction” of “30 percent or 40 percent minimum!” It’s now three months and change later, and the S&P 500 is up almost 1%.
Warren Buffett on predicting the stock market
Warren Buffett also offers some sage advice on the subject of market forecasts: “A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting.”