Forecasting, Behavioral Finance, Investor Sentiment

Groundhog Day 2008

By, 12/18/2007

The close of each year stirs an instinctual phenomenon in the professional finance world. Like premature Punxsutawney Phils, investment institutions scramble forth from the warmth of their Bloomberg machines to forecast the climate of the upcoming calendar year.

This barrage of forecasts each year end is explained by behaviorism's theory of order preference – an insistence on certain things in a certain order for little purpose other than societal convention. Why not forecast every 24 months instead of 12? Or each April instead of December?

In truth, a calendar year's end means little to stocks. Markets go on—milestones like months and years are delineations of the mind and little more. But still, most investors engage in the prognostic ritual each December. In the next weeks you'll hear many big-name gurus squawk (or should that be squeak?) their forecasts.

Of course, forecasting is a necessary thing for successful investing. If you don't have some idea about where markets are headed, then beating the market is significantly tougher (if not near impossible.)

Most forecasters—even the gurus—fall wide of the mark. That's because the factors driving most forecasts are usually derived from widely available information, are already broadly known, and therefore priced into the market. If there's one thing we know is true, it's that you have to know something others don't to beat the market.

Still, paying close attention to what the gurus forecast is important. Why? Because a lot of folks look at them! So that means what they're predicting becomes widely known—the antithesis of information that can beat the markets. So you've got to know what others are pricing in today to even have a shot at beating the market later.

As always, we advise critical thinking on these matters and to eschew herd behavior. After all, it's been proven time and again that most stock market gurus with verifiable track records are wrong more than they're right—making them about on par with good ol' Punxsutawney Phil, who's shadow detection technique of discerning spring's arrival is right well less than 50% of the time.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Click here to rate this article:

2 Ratings:

5/5 Stars

2/5 Stars

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.