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A reader at Barry Ritholtz' blog asked him the following question;

I believe you have written the above statement before on your blog, though I don't have any links to prove that, and while I too believe forecasting is fatal, my feeling is that you must use some forecasting when choosing stocks/funds/ETFs for your clients.

The context was the extent to which Barry refers to the Folly of Forecasting. I think Barry and I draw similar conclusions about the role of forecasting in the management process and what really should be forecast.

I think a big part of my influence here comes from John Hussman. From the idea of taking little bits of process from various places to create your own process, Hussman tries to assess probabilities of outcomes that are broader than whether to buy Qualcomm (QCOM) before its earnings or having a year end target for some broad index.

The role of "forecasting" is more along the lines of trying to swim with the current than against it. For example, when the market starts to discount a recession/bear market, the industrial sector tends to get hit very hard, which is something I have mentioned many times before. Rising interest rates are bad for certain sectors. Bull market phases tend to last four-five years. There are quite a few others that I have mentioned over the years.

In my opinion, understanding these sorts of rules of thumb can make the task of navigating a cycle a little easier. After a five year bull run, it probably makes sense to not give the market the benefit of the doubt when it shows signs of rolling over slowly (another rule of thumb is that bear markets start slowly over several months, they don't start with fast declines).

These sorts of things are part of the top down process and contribute to the decision to be in the market or not, how much to be in and decisions about sector weightings. Hopefully it is clear that this part of the process is reasonably accessible to many participants and can go a long way to successfully investing at the sector level. And of course, just about every fund provider has a suite of ETFs to get the job done.

Source: Forecasting: Don't Swim Upstream