2008 Crystal Balls Are Bad for Your Health

Over the past two weeks, my favorite financial media sources have been vomiting 2008 prediction after 2008 prediction. So, I think this is a good time to address a few of the major flaws with annual predictions that encourage us to buy and hold investments for the entire new year.

1) Economies and economic transactions do not know when one year ends and another begins.

Technically speaking, time is a convention used to measure relative changes in matter and energy. Where we draw our lines in the sand are completely arbitrary from a cosmic perspective. So, why all the fuss about reallocating assets and rebalancing portfolios for the new year?

This approach has no rationale. In fact, I think annual stock advice causes more harm than good because less savvy investors make broad stroke investments, hold through the inevitable unforeseen events, and open their eyes when it’s time to worry about taxes and holiday gifts.

Further, moving from May to June is just as meaningful as moving from December to January. For example, Agribusiness (MOO) has not changed one bit because Santa Clause left the North Pole. The only businesses affected by a change in the month are seasonally dependent businesses. And we definitely cannot maximize seasonal trades if we only buy or sell in January.

2) Global events can change drastically from week to week.

In 2007, Iran came into focus as a potential war combatant, and later fell out of the proverbial cross hairs. Putin in Russia (RSX) still had many fooled at the end of 2006, but is now openly viewed as ruling with an iron fist. In November, Africa (GAF) was one of the hottest new places to invest, yet by January they proved true change remains far off.

I raise these issues because many people will buy oil (USO) on the supply and demand thesis, but 2008 may bring news of a new major oil discovery at the hands of Chinese exploration companies. Or, a black swan such as An Inconvenient Truth will surface and raise immeasurable awareness of something on the periphery like renewable energy (PBW). A terrorist attack may occur at the Olympics, or a Republican may make the majority of US voters feel safe and fuzzy (something that apparently wins Presidential elections in the US). The point is: there are very few foregone conclusions in this grand global social experiment - and even fewer the longer the duration our predictions hope to span.

3) Effects of major annual events are usually impossible to figure in January.

As noted above, the US Presidential election may be a closer race than currently portrayed. In 2003, the media was saturated with anti-Bush rhetoric and “We must change now” anthems. Nine to twelve months later President Bush surprised many. And look how Obama has charged ahead in a matter of weeks.

Will the world continue its affair with Chinese stocks (FXI) after the Olympics? Or will visitors realize the Great Dragon is actually version 1.0 rather than the 3.0 stocks and government controlled PR would have us believe? Will Monsanto (MON) continue to genetically modify the world’s food supply, or will an Indian or Chinese activist bring the biotech company to a halt?

I do not know the answer to these questions or anyone who does. I suggest the savvier investor cares not what the answers are so long as they are ready to react like a Zen Samurai master. Yet year after year I meet countless ‘annual prediction’ buy-and-holders who end up bag holders 12 months later.

4) No one has repeatedly predicted in detail what will happen in the world or markets in an upcoming year.

Last but not least, the scientific method indicates that annual predictions are luck. Unlike contests based on skill, every annual stock market prediction contest has different winners and top finalists each year. I don’t know any psychics who have won the lottery multiple times or gamed the stock market every year - and if they exist, they surely don’t work in financial journalism or get much coverage. This fact alone should make you very skeptical of chasing “hot” fund managers or investing hard earned money in an annual pick from some guy in a $3,000 suit on the cover of Forbes or Barron’s (and the following year will bring new hot funds, faces, and suits).

Rather than leave you with an annual prediction I leave you with experiential wisdom: stay current while observing the world and you will better react as an investor. When trends arise, note their beginning and keep a close watch as they unfold. Do not assume that great ideas in January (e.g., buying puts of retailers) will remain intact later in the year. Do not assume that what worked during the previous 12 months (e.g., industrials) will work during the next 12. Change is a universal constant, and the best traders use this law to make superior profits.

Not many people can tell you what will happen next week let alone the entire year. So-called prophets of every generation have predicted the end of days during their life, yet to date all have been wrong. And how many people do you know with a working crystal ball or unicorn in their backyard? But who am I to say we won’t find some in 2008 …

Comments

[BxCap:]

I would normally agree with you but some people are better than others in understanding the major trends. Ken Heebner for President 2008.....

2008 Jan 06 02:54 PM

[Expat:]

this sure sounds like a stock bull griping and moaning and blaming everything on the media and pundits. Of course, the same media and pundits were gleefully cheering on the bubbles but back then they were "right" and "righteous".

And since when does a prognosticator need to be one hundred percent accurate?

We arbitrarily divide our time into discete quanta: days, months, years. There is a great deal of signifigance to calendar years because of accounting rules. So, predicting annually makes perfect sense.

As for the rest, you are merely stating that no one can predict unpredicted events. yup. you got us there.

So, if I now give you my predictions for 2008;
1. DOW 38,000
2. median house price 422,750 USD
3. USD/Eur at 0.82
4. Average income tax rate cut to 8%
5. Average dividend on NYSE goes to 18%
6. Peace, love, and happiness for all mankind forever and ever

Am I good or what?

2008 Jan 07 01:53 AM

[SmartGuySto...:]

Expat,

If my thesis is as obvious as you say, why is Barnes & Nobles filled with 2008 predictions, and why do the masses keep falling for this garbage?

You may be insightful, but the history of Wall Street and investing evidence that you are indeed rare.

2008 Jan 12 02:56 PM