Why Do People Make Market Forecasts? 14 comments
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Yesterday, Joe Wiesenthal criticized the idea of Nouriel Roubini making stock market forecasts. Felix Salmon jumped to his old boss’ defense by saying that forecasts are indeed worthless, but the reasoning behind the forecasts can be very interesting.
Then why did Roubini make a forecast in the first place? His audience just expected it? Hmmm. I think I have an answer, and it’s not a complicated one.
The dirty secret is that stock market forecasts are fun.
It’s odd that people ignore this basic insight. Markets are a lot of fun. Sure, every serious person is seriously concerned over market forecasts because they’re not serious. Still, people do it anyway. Why? It’s damn fun.
The worst moment of Stewart vs. Cramer was Stewart saying that finance isn’t a “game.” Oh please! Cramer may deliver his advice in a clownish way, but the advice is serious. The thing I hate about Jon Stewart is that he combines too much self-righteousness while being too little informed. The two reinforce each other. Stewartism is really an invitation to ignorance. As long as you have that smug, knowing attitude, who needs to actually understand the issues?
Finance is and has always been a game. I’ve noticed that over the past few years the look of ESPN and CNBC has become steadily similar. That’s not an accident. They’re both graphics heavy, fast-moving, male-oriented and a datanaut’s dream. Heck, the indexes are nothing but a scoreboard. All that’s missing is Gary Glitter blasting away.
Picking stocks and seeing which way the markets go every day is one of the best things about investing. You get to pick a thesis and see if you’re right in tell time, and you can make money while doing so. Look, we’re not allowed to do anything anymore. The country has been reduced to be a bunch trans-fat-less, non-smoking, Happy Holidays ninnies walking through airports in our socks. Don’t take this one simple pleasure from us.
I always enjoyed telling a client that the stock they bought last week at $20 is now at $28. That’s an amazing feeling. You made money with your money. I often people, professors especially, say that indexing is the only way to invest. Dear lord, these people can take the sex out of anything. They tell us that it’s impossible to beat the market consistently (curiously, they leave out the other side that it should be impossible to lose to the market as well).
Put aside the arguments for or against EMT, people will still try to beat the market but it’s a frickin blast. I would even argue that the amount that would be lost versus the market is more than made up for the participant’s enjoyment factor. There’s also no reason to buy a luxury car. That’s a complete waste of money yet people do it. I won’t judge them. If they enjoy it, good for them. The amount of wasted on a luxury care probably exceeds what many folks would suffer by not indexing, assuming it would cost them anything.
Have you shorted some worthless stock and had it pay off? Man, that’s a great feeling. Who needs heroin when you have Advanced Micro?
In his book, An American Hedge Fund, Tim Sykes talks about how exciting he found the stock market while he was in college. Soon, his investing activities overwhelmed his college activities. Of course it’s addictive, because it’s fun. Trading or forecasts aren’t harming people. Investing and risk-taking is good for a society. Obviously people should know what they’re getting into, but that’s why I started my blog.
I’ll leave it to the professional worriers to grand-stand over the rollicking style of finance. But I’m having a blast.
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For the record, here's the contents of an item from MoneyNews.com dated July 17, 2008:
Headline: "Cramer--Stocks Are Doomed, Sell Now"
Body: "Cramer frequently tells his audience that he believes there is always a bull market somewhere, and it's his goal to help them find it.
"'But this time it's different; it's doom itself," Cramer recently wrote in New York magazine. "In 25 years on Wall Street, I have never seen things this bad.'
............
"'Sell everything. Nothing's working,' he writes. 'Revisit when the prices are adjusted for a big recession, soaring inflation, and a crushed consumer. Sell at 12,00 and come back at 10,000. Even better, short it,' said Cramer."
Roubini, Schilling and other are to paid to make forecasts.
Those with political agendas offer forecasts as a way to justify a means to an end. Most brokers develop forecasts to sustain their vested interests; excluding trading profits, more money is made during bull markets than bear markets. And for the rest, the motives are probably as varied as the forecasts themselves.
I suspect most of us on SA try to anticipate market direction in an attempt to profit and to "play" in one of the most intellectually demanding games there is.
I suppose it's a nice game to play -- if you have enough money to be wrong. tell the people whose retirements are bankrupted that its a game, and that their losses were outweighed by the enjoyment they should've been having in it. The people who try to sell the market as a vehicle to save for retirement should take it as seriously as that is.
Like they say, it's all fun and games until someone loses an eye. Wow! i sound just like my mom, etc. etc., what a jerk am i! Total killjoy -- that's me! But your flip attitude suggests you probably don't have a parent or grandparent who's flipping burgers now.
As for why we make forecasts, well, i'm with Salmon that its the process, the attempt at understanding, that makes the (usually useless) result worth it.
The fact that a career academic and policymaker like Roubini doesn't know how worthless his opinions are speaks volumes. Who cares if the market is going to 5,000 ... 6,000? What's it going to tomorrow and when will it change course? That's what I need to know. Unless you can predict movements with 100% accuracy, I don't see the value.
If you were to take Roubini literally, you would have been short and missed an incredible run these past six trading days. In fact, shorting the Dow would have lost you 13% PLUS the 13% gain you would have made if you were long (opportunity cost). That's a 26% swing. If you were trading 2X ETF's, the difference would've been 52%!
Ignore the predictions and don't fight the tape.
When you listen to Jim Rogers or Marc Farber, you hear someone who has a chessmaster's understanding of how one "move" or event will possibly impact someone else's move, and then the next moves, etc. Not today or tomorrow, but as things unfold in coming years..They don't "marry" an idea, because other, new events may cause a course change, but they estimate the most likely probablities, and adjust with new information.They have studied human history and understand how fortunes, power and cultures shift over the course of years or decades. History often does repeat, but in various and not easily recognizable ways.
When Rogers says he is investing in "water", he explains that history is his guide. Wars have been fought over water. It is vital, and the world is running out of it in may areas. He guesstimates how it might play out, long term. Because he has done and continues to do his homework, his predictions have a better success rate.
Jim Cramer takes his fair share of bashing for his stock predictions. Many call him a "clown" (and worse) and ridicule his picks-- citing a few that were very wrong. Fair enough, I suppose. But when Cramer ran his hedge fund, he was up before 3am every day studying and preparing and planning for the next day, week, year. He never wanted anyone to get the jump on him. And his "predictions" (hard work) made his investors and himself a fortune. And his "predictions" were much more right than wrong over the course of a decade. I doubt he puts in anywhere near that amount of work these days, but I have no doubt he could do it again if he needed to.
You will often hear others say "so-and-so is a moron who just got lucky." And often enough, it's true. But it is also true that luck is often the residue of hard work. If you work hard at trying to put yourself in "the right place at the right time"...there is a decent enough chance that once in your life you will be at that place. At precisely that time.
One may not know whether someone is going to clear a level of donkey kong but judging on their past performance you get a decent clue about whether or not the big monkey is gonna pwn them or not.
It is curious to note those making the forecasts aren't very good at keeping a scorecard of their wins and losses and don't seem to care correcting themselves either. I would generally call this very noob behavior. That is probably why they constantly fail to improve over time.
The other answer could be that they are getting paid alot to blow wind up others privates and don't care because they have no vested interest. Ask any kid, it's fun playing arcade games when someone else gives you free tokens. Also, their performance tends to be somewhat lacking compared to when they play with their own precious coins. Funny how that is.
You date yourself......
And he hides behind humor. If he says somethings that is truly ignorant or offensive he "was just having fun", if someone else does they were treated as being serious, even if they were kidding.
He's a funny guy but he's ignorant as can be. He'd be the first one the Taliban would kill if they had the chance; they'd skip by George W Bush to get to ass-clowns like Stewart.