Every year on the day after Thanksgiving, my family makes a two-hour drive west to the mountains of North Carolina on the hunt for the perfect tree to celebrate the holidays. It is no doubt one of my favorite family traditions.
Our tree-chopping outing just happens to coincide with the start of one of my other favorite pastimes: finding humor in the financial services industry’s annual predictions season!
At Blueprint Investment Partners, our team loves predictions. Not to make them, but to make fun of them. The idea that the average asset manager, let alone investor, can consistently predict the direction of any market or instrument reliably enough to beat a passive index over a long time period is in a word: cute.
It’s akin to your buddy down the street saying he can beat the 12th man on an NBA team in a game of 1-on-1. When you hear him run his mouth on that topic, you may not laugh out loud, but inside you are cackling. That’s how we feel when we read or hear market predictions.
Checking In On 12 Predictions for 2023
Financial services predictions are so abundant it seems unfair to pick on a single person, but an example helps. At the beginning of 2023, Sean Williams shared, “12 Stock Market Predictions for 2023,” on fool.com. Checking in on those predictions now that the year has concluded, the final accuracy rate is one out of the 12 – that’s right, around 8%. But Williams isn’t alone in making some predictions that, now with the benefit of hindsight, are laughable.
Imagine if meteorologists were accurate just 8% of the time.
People constantly have a wisecrack ready about the accuracy of the weather forecast. Yet if we were to objectively look at the data, I expect the success rate of weather predictions is relatively impressive, particularly with today’s radar and modeling capabilities.
Compare that to predictions about financial markets. The latter are far less accurate, in my view, yet based on all the clicks, comments, and media coverage, I’d say financial predictions are still held in high regard.
Predictions Without a Process are Useless
Let me make this clear: Like almost everyone else, the team at Blueprint Investment Partners stinks at predictions. It’s why we don’t make them, don’t think others can successfully make them on a consistent basis, and ultimately eschew them for the opposite of a prediction: a rules-based, systematic process for portfolio management.
In our opinion, predictions without a process are useless.
It doesn’t matter what you think will happen; what matters is what you do with that thought. In other words:
- When do you enter the market (buy)?
- When do you exit to increase the chances of incurring a profit (sell)?
- When is it worth exiting and taking a loss (sell)?
- How much do you buy or sell?
These are the key decisions that determine an investor’s financial outcome over time. You can make predictions – or heed the ones made by financial pundits – all you want, but without a process for managing them, what’s the point?
Predictions are Made Emotionally & Justified Intellectually
Predictions are also too easily influenced by and connected to emotion or ego.
Watch any sports talk show for a very long time, and you’ll likely hear some variation of the phrase, “I’m sticking with my prediction...” even after evidence to the contrary mounts.
Our CEO and Co-Founder Jon Robinson is fond of critiquing other asset managers by saying, “Investment decisions are made emotionally, and justified intellectually.” Predictions are fertile ground for emotional decisions and intellectual justifications.
We think almost all consistently successful asset managers rely on a repeatable process rather than predictions. Even when an investor makes decisions on discretionary factors instead of algorithmic ones, it is possible for them to be made with a process rooted in on odds rather than strictly a prediction. For example, what some might call a prediction by Warren Buffett on a given investment, we see as a calculated, systematic bet based on a variety of fundamental factors.
As a tactical asset manager, Blueprint Investment Partners believes in and acts on investing systems that prescribe regular rebalances to tilt our portfolios toward stronger assets and away from weaker ones. We are an active manager. And yet, to illustrate how harmful we believe predictions are, we would accept a passive approach over a tactical one that relies on predictions any day.
Looking at just the last 24 months of predictions versus reality shows both the folly in making them and the foolishness in faithfully following them.
At Blueprint Investment Partners, our process aims to remove guesswork and angst about the market’s direction, which should allow financial advisors to focus on serving their clients and improving their practices. As we kick off 2024, that is where our focus remains. We are and will continue to make sizeable investments in new ways to serve advisors and help you thrive.