Monday, December 5, 2011

Question Authority

As we approach year-end, you're certain to see a wave of news stories offering perspectives on the outlook for the coming year.

True confession: This exercise drives me crazy, as I feel it is almost always a waste of time.

As that great philosopher Yogi Berra once said: "It's tough to make predictions, especially about the future."

But still people persist in trying to forecast the next 12 months, and since apparently someone reads these, it's worth going back and seeing how well the "expert" predictions fared for 2011.

Here was one that was a favorite of many market strategists a year ago:

Historically, the third year of a Presidential cycle has been good for stocks. If you go back to the third year of a President's term - either Republican or Democrat - stocks have usually produced attractive returns. Ergo, stocks should do well in 2011.

So what's happened in 2011? Writing in this Saturday's New York Times, Floyd Norris took a look:

Through November, an investor in the stocks in the Standard & Poor’s 500 had a small profit of 1.1 percent this year, including reinvested dividends. But that figure was a 6 percent loss a week earlier, before investors took pleasure from positive reports of post-Thanksgiving retail sales and became more optimistic that another round of European summit meetings next week would reduce the threat of a new financial collapse.

Psychologist Dan Kahneman points out that it is a natural human tendency to look for patterns where none exists. Could the "Presidential Cycle" be a perfect example?

Oh, and was there a single strategist that thought that interest rates would plummet to 60-year lows?

And what about those confident predictions that U.S. investors should plunk a large sum of their funds in overseas markets? The world's markets have almost all been money losers this year - the US market returns may be weak, but at least they're positive.

I could go on, but you get my point.

My advice: Recognize that predictions of the future are best left to soothsayers. In my work, I try to find investments that will fare well in a number of different scenarios, including those that might seem wildly implausible at the time.