Stop Taking Market Predictions Seriously

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Chris Davis:

I always begin our comments by showing you this data that Bill Miller and I started collecting 30 years ago that takes the top Wall Street strategists and economists. It takes their prediction for interest rates six months from now and it scores them as correct if they get the direction right, not even the number, just the direction. And what you could see is it's wrong almost 60% of the time, including in the most recent period. So it is amazing that we continue to spend time on it when it doesn't have that. You really want to see something that I find staggering, especially when I'm involved in investment committees for endowments or colleges, things like that. It is amazing to me how there's this constant belief, well, even if predictions aren't instructive longer term in aggregate, there are definitely some experts that are very good at making these macro predictions.

So we did something sort of a dirty trick here, which is we simply looked at the 10-year return of hedge funds in general, the hedge fund index, and then we creamed out just those hedge funds whose strategy is explicitly macro. In other words, it's they invest based on their macro forecast. I mean, that is a staggering amount of wealth destruction, especially when you add in a little two and 20 or whatever the heck they're charging on top of it. So that's what we can't do, right? What can we do? Well, we can guarantee that there's going to be a 20% or more correction. We just don't know the timing of it. On average, there's been one every three and a half years and 10% every year, and it is a inevitable and unpleasant part of the investment landscape, but it's an admission fee. It doesn't signal that you're doing something wrong or something's going wrong.

It's in essence the admission fee you pay in order to be able to invest in an asset class that has added real value over long periods of time. But of course, when we get that 20% correction, whether it's tomorrow or a year from now, CNBC will air a special report. And so we did another dirty trick here, which is we looked at every time CNBC has aired a special report on market turmoil. And of course, nobody says, "Oh, this is just an inevitable but unpleasant part of the landscape." They give you all the reasons why it's the end. And we simply tracked how did the market do in the one year following the CNBC special markets in turmoil report? And 100% of the time there was a positive market return with an average one year return of 40%. Well, we wouldn't project that, but it is just sort of a reminder that when that heats up all of the drama around it, nobody is going to be telling you it's just an inevitable and unpleasant part of the landscape.

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