I recently received an email from a woman who has money to invest.
She wanted to know whether it’s a good time now, or whether she should wait.
She fears that UK stocks might fall based on happenings in Silicon Valley.
Nobody can predict, with any degree of accuracy, how stocks will perform today, this week, or this year.
Plenty of experts trumpet their opinions.
But CXO Advisory put them to the test over a seven-year period.
They tracked 6,582 stock market forecasts made by the world’s leading economists and stock market experts.
It turns out they were no more accurate than a three-year-old tossing darts.
In 2021, Daniel Kahneman, Olivier Sibony and Cass R. Sunstein published their book, Noise: A Flaw In Human Judgment.
They referenced a quarterly survey that seeks to learn whether the CFOs of publically traded S&P 500 companies can predict how the S&P 500 will perform in the year ahead.
In this ongoing survey, the CFOs are asked to provide two numbers: a minimum and a maximum range for the S&P 500.
So far, the market’s return has landed within that range just 36 percent of the time.
If the world’s leading economists and blue-chip company CFOs can’t predict how stocks will perform, there’s little hope for the rest of us.
Yes, we could get lucky.
Even a broken clock is right twice a day.
And plenty of forecasters have milked fame from a “prediction” only to fall on their faces when they open their mouths next.
There are two reasons we can’t predict the market.
One is based on economics.
We simply cannot see the future.
The second is based on how human beings respond to economic news.
In other words, even if a Nostradamus could, with pinpoint accuracy, provide data on future interest rates, GDP growth, employment figures, individual company profitability and government policies, we still couldn’t predict how stocks will perform.
That’s because economics don’t move the stock market.
Human beings do.
In April 2020, when the pandemic raged, more people added money to the markets than withdrew money.
That’s why stock values soared during one of the most challenging years in economic history.
Nobody predicted that.
Nor can we predict human outcomes when we’re provided with specific patterns and reams of data.
Here’s a case in point.
The Fragile Families and Child Well-being Study was devised by a team at Princeton University.
It was a large-scale, longitudinal study that followed children from birth to fifteen years of age.
The data covers the education and employment histories of the parents and the grandparents.
It covers details about the health of all family members as well as details of their financial and social status.
Further data comes from multiple questionnaires as well as tests on cognitive aptitude and personality.
More than 750 scientific articles reference this study.
Many of those researchers used this data to explain what factors might lead to better school grades or a criminal record.
But such researchers were like stock market pundits who said, “Stocks crashed in 2008 because of factors A, B and C, all converging.”
Pundits even do this on a daily basis, explaining why the S&P 500 rose or declined in a given day, based on something that happened with corporate earnings, politics, interest rate declines or the birth rate of Polar Bears that afternoon.
This doesn’t just come from the desire that analysts and business networks have to look super smart in retrospect.
Humans simply need to make sense of the world, so we make up stories to explain why things happened.
But as much as they might make sense, those stories are typically delusions trying to put our minds on solid ground.
Princeton researchers wanted to find out how well social scientists could predict life events for the participants in The Fragile Families and Child Well-being Study.
They invited teams of researchers to compete to see which could best predict the children’s life outcomes.
Each team was given all the data on several families.
They were asked, in each case, how they thought events for specific families would turn out.
The final report included the predictive results from 160 qualified teams.
Some of the “qualified teams” were machine algorithms, not dissimilar to those that try to predict stock market movements.
Unfortunately, all the background data in the world didn’t allow the experts to predict the future of those families.
The official admonition stated this:
“Researchers must reconcile…that none of the predictions were very accurate.”
It’s no different with the stock market.
We can’t predict future economics.
And even if we could, we can’t predict how people will respond to those economics.
So, here’s my advice.
Don’t seek opinions on Facebook.
Don’t seek opinions on Reddit.
Don’t seek opinions on CNBC.
Turn off the noise.
Invest as soon as you have money.
And invest as regularly as you can.
Andrew Hallam is the best-selling author of Millionaire Expat (3rd edition), Balance, and Millionaire Teacher.
