A Warning About Predictions: Financial Advisors' Daily Digest

by: SA Gil Weinreich

Summary

Jeff Miller and Rob Marstrand offer incisive criticisms of the misuse of data.

Kevin Wilson conjectures that markets have been reduced to state-run enterprises trying to repress a sell-off.

Wealthfront warns there is no diversification benefit to using more than one robo-advisor.

If you’ve got limited time today, then at least read Jeff Miller’s critique of an article in The Wall Street Journal forecasting a recession and Rob Marstrand’s examination of how the same data point looked at in the U.S. and U.K. leads to opposite conclusions. (The two articles lead the list of daily links below). Both articles are important because they help readers understand the dangers inherent in facile interpretations of data. Writes Jeff Miller, about that WSJ article:

The entire article reads like a laundry list of points that would make sense to investors with limited knowledge of economics. That is why I am disappointed. My hope is that top journalists would help explain the reality rather than feed the fears stoked by so many others. This article will frighten investors. Is that what the author intends?”

I found all of Jeff’s points to be valid (please read the entire article) but wanted to briefly address the fearmongering aspect, mainly because I have personally written commentaries taking a dim view of certain trends. (I’ve written upbeat things too!) Here is what I think is an important distinction – one I try very firmly to maintain.

I believe there is a difference between a prediction and a warning. It’s a subtle distinction, so please pay close attention. Both predictions and warnings sift through facts, data, and trends in order to suggest where current events are leading. The differences is that a prediction draws a conclusion, e.g., because of a, b, and c, the market will crash, probably sometime in the second half. This form of “analysis” is exceedingly common. I personally view it as tantamount to soothsaying. I will include links to such articles when I find the analysis strong (not necessarily because I agree with the analysis, just that I think it is thoughtful).

In contrast to the prediction genre comes what I like to think of as a warning. In terms of their media prevalence, I’d estimate former outweighs the latter by at least 100 to 1. A warning also assesses and weighs conditions and draws attention to where the trends lead but takes the view that the warned-of condition is likely to occur unless some major unforeseen factor derails the trend. Writers who warn eschew predictions because they understand that forecasting the future is a fool’s errand. Sure, as investors, we need to take a view of the future in selecting one investment over another. I do that myself. My analysis of trends will lead me to favor X and steer away from Y. But, consistent with my deeply held belief in the foolishness of predictions, I diversify heavily as an admission of my own ignorance.

My antipathy to predictions should not be seen as tantamount to not having a strong view. For example, I very strongly believed that the Brits would vote for Brexit and said so loud and clear to friends and neighbors, including British ones; and I was convinced Donald Trump would become president even when his opponent was beating him by double digits in all the national polls and his support, political and financial, appeared to be collapsing. I also was loud and clear about this with people I knew and even allowed some comments on SA to this effect. But I wouldn’t write any articles about this. Sure, I had my reasons for thinking these things. But the last thing I would want to see is people lose money because they were relying on my predictions which turned out wrong. (I’ve been wrong before.) Even worse, I’d hate to publicly lend credence to the idea that people are good predictors. Firm though my view was, I rejected the idea of participating in betting markets and see myself thus reduced to the profession of a gambler. (I won’t even buy a $1 lottery ticket, nor put a nickel in a slot machine.)

I hope the above disclosures help readers understand my approach to analysis. When I write about, say, the pensions crisis, you can be sure I am genuinely worried about prospects for their solvency. I don’t see very much good news on that front, which is why my articles may inspire a bit of fear. But I make no specific predictions because I certainly recognize the possibility at least that some new, unexpected economic development will start flooding state coffers with revenue. (Sorry, New Jersey: I don’t rate the state lottery whose revenues are now meant to shore up your poorly funded pensions as a good, long-term solution.)

Please share your thoughts in our comments section. And here are today's financial advisor-related links:

  • Jeff Miller helps a financial journalist do his homework (by correcting errors in interpreting data).
  • Rob Marstrand explains how the data leave ample room for misinterpretation.
  • Kevin Wilson (welcome back!) conjectures that markets have been reduced to state-run enterprises trying to repress a sell-off.
  • Wealthfront warns there is no diversification benefit to using more than one robo-advisor.
  • Russ Thornton advises investors to stick with their plan.
  • Cullen Roche: Factor picking is the new sector picking.
  • Mohamed El-Erian assesses the year’s first half and advises what to watch out for in the second.
  • Nanette Abuhoff Jacobson: Japan’s stocks are cheap, its economic improvements underappreciated.

For more content geared to FAs, visit the Financial Advisor Center.

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