Why Do People Make Market Forecasts?

by: Eddy Elfenbein

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.