Source: Barron's

People have a strong desire to predict the future, whether it's predicting personal lives or the economic situation of society as a whole.

Many researchers believe that the reason we can't predict future stock prices is because the market is “effective.” The “effective market hypothesis” argues that all publicly available information is quickly reflected in a company's stock price, so we can't beat the market by finding stocks that are too high or too low.

Although this hypothesis has received a large amount of support, there are also some anomalies that have made some people question whether the market is completely effective. However, even if the “effective market hypothesis” doesn't apply to all situations, it doesn't mean we can predict future stock prices. As Burton McGill said, “Although I believe it is possible to achieve higher levels of professionalismROIBut I must emphasize that the evidence we currently have does not prove that this phenomenon exists”.

The reason why the stock market is unpredictable is that even if the stock price rises, it does not rise gradually and steadily. In contrast, there were only a few days of the year when the increase was significant, while the rest of the year was relatively stable. As Gary Belsky and Tom Gilovich said, “The description of the stock market is a lot like the description of war — a long period of dull boredom interrupted by a pure horror episode.” Research shows that if you miss the top 40 trading days out of the 7,802 trading days from 1963 to 1993, your average annual return would drop from just under 12% to just over 7%. The problem is that there is no reliable way to predict which days the stock will perform best.

What caused the major shift in the stock market? William Sheldon gave a reasonable explanation. He said, “The stock market is clearly driven by irrational popular mentality and group mentality. In terms of profit potential, the speculative boom has caused the stock price to soar to a level far exceeding its economic value. Panic can have equally irrational consequences in the opposite direction. The stock market is like a bowl of ecstasy that combines fear, greed, hope, superstition, and many other emotions and motivations.”

Let's take another look at Black Monday. On October 16, 1987, the day the stock market crashed suddenly and there were no signs. Compared to the previous Friday, the stock price has shrunk by 30%, and there is no real and reliable information to explain this decline. This irrational state of the stock market shows that the “effective market hypothesis” does not reveal the full picture of the stock market.

A more complete explanation is that the stock market is a complex system in which rational and irrational forces work together. As Sheldon said, “Although rational forces drive the stock market towards reasonable values, the irrational forces of speculation and panic cause the stock market to deviate from reasonable values.” These irrational forces can trigger explosive nonlinear movements, making the stock market unpredictable.

However, we are spending billions of dollars making predictions. So what lessons can we learn from this? In a sense, the stock market is like tossing a coin. If we toss a coin 1000 times, then we can be sure that we can throw half of the positive and half of the negative results, but we can't judge the results of every coin toss.

Similarly, if we invest in the stock market, it is quite certain that it will rise over the long term, but it is difficult to continuously predict which stocks will outperform the market. Therefore, investIndex fundsIt may make more sense to hold the fund for a long time, because in this way we can reap the rewards of the general upward trend in the market. But what about those stock experts who offer hot advice? You have to ask, “If these people can predict the stock market, why don't they have a rich country to beat themselves?”

In fact, if stock analysts can predict future stock prices, then it makes more sense for them to leave this valuable information to themselves, because if they did, they could make a big profit in the stock market, but they didn't, and they sold this information to you.

Why we still want to trust predictions

There is quite a bit of evidence that spending a lot of time analyzing and selecting individual stocks is worthless. Of course, if you just want to have fun — say you love this game — then go for it. But if you think you can choose stocks to outperform the market, you're fooling yourself. Yet the gifted are still convinced they can do it.

Recently, I had a chat with a colleague who is one of the most academically educated professors at our school. He said he can select better stocks through fundamental analysis, a technique for determining the intrinsic (real) value of stocks based on the company's potential economic variables. The technology assumes that when the market price of a stock is lower than its intrinsic value, the stock is undervalued, and when the market adjusts appropriately, the stock price will rise. This seems to make a lot of sense, so many people believe that fundamental analysis works.

In fact, my friend told me he has evidence to support this belief, and he also specifically mentioned the research of Benjamin Graham, the father of fundamental analysis. However, as Professor Burton McGill points out: “The academic community has made its own judgement. Fundamental analysis is much the same as technical analysis when it comes to providing investors with better-than-average returns.

In fact, Graham himself reluctantly came to the conclusion that fundamental analysis can no longer generate favorable returns. He said he no longer advocates the use of complex securities analysis techniques to find advantageous value opportunities. If 40 years ago, securities analysis was a beneficial activity when “Graham and Dodd's Securities Analysis” was first published, now the situation has changed... (Today) I doubt that such a huge effort would generate enough quality choices to justify their costs... I am now a member of the 'effective market' school.”

A few days later, I met my friend and sent him this passage, and I asked him, “Isn't this the authority you mentioned?” He reacted so strongly that he simply tore off the note with that passage written on it and shouted, “That doesn't make any sense!” Although his authoritative people say that this method no longer works, my friend still doesn't believe it. Instead, he once again reiterated that fundamental analysis led him to select many successful stocks.

As I continued to ask, he said, “Sometimes I chose the right one, sometimes I chose the wrong one.” I said, “What if you're wrong 60% of the time and the value of your portfolio falls?” He answered, “That's my fault, and I'll learn from it.” I asked, “What if this method doesn't work year after year?” He answered, “Then I'll have to learn how to use it better.” In fact, he was reluctant to question his belief in fundamental analysis, even in the face of a plethora of opposing empirical evidence. What is the reason? Because he trusts his own personal experience rather than scientific investigation, as we have seen, trusting anecdotal evidence is one of the main triggers for false beliefs.

Fundamental analysts often attribute their gains to fundamental analysis while blaming losses on other causes, such as the overall economic downturn. However, with this theoretical foundation, fundamental analysis cannot be falsified, and anything that cannot be falsified is worthless. If you decide to invest in individual stocks, what should you do? Keep track of the profits and losses of every investment you make, and keep an eye on successful and unsuccessful investments at the same time. Over time, you may realize that you don't earn more than just investing in index funds. As another colleague of mine recently discovered, if you don't use this method to track records, you're bound to make extremely costly mistakes. This colleague used to invest money in index funds until he was persuaded by a friend to vote for individual stocks — when the entire stock market rose, his individual stocks lost 40% of their value one after another!

Exactly how accurate are economic forecasts

Some people pay for astrologers to predict the future, others pay stock analysts to provide stock selection advice, and we as a society as a whole spend billions of dollars on economic forecasting. Many government agencies and hundreds of private organizations sell economic forecasting information.

Just how accurate are these predictions? A review of 12 studies on the accuracy of predictions from 1970 to 1995 concluded that economists couldn't even predict major turning points in the economy. One study looked at six major economic forecasting agencies, including the Federal Reserve, the Council of Economic Advisers (CEA), the Congressional Budget Office (CBO), General Electric, the Bureau of Economic Analysis, and the National Bureau of Economic Research, and the National Bureau of Economic Research, to analyze their error rate in predicting gross national product (GNP) growth and inflation over the next eight quarters. Of the 48 predictions they made, 46 didn't reach an economic turning point.

Another study showed that the Federal Reserve's previous predictions were worse than those predicted by probability. From 1980 to 1995, only 3 of the 6 predictions made by the Federal Reserve (the same as the probability predictions) predicted a major inflection point in actual GNP growth, and failed to predict 2 inflection points in inflation. As a result, the Federal Reserve's forecast accuracy is only about 38%. The Economic Advisory Committee and the Congressional Budget Office did not perform well in predicting the 1976-1995 economic inflection point, with an overall accuracy rate of only 36% and 50%, respectively.

These data suggest that major economic forecasting agencies cannot predict whether our economy will reach a major turning point. As William Sheldon said, “The inability of economic forecasters to predict economic turning points (such as the arrival of a severe recession, the beginning of economic recovery, and the onset of a period of rapid rise or fall in inflation) has become the norm. In fact, they weren't able to predict the four worst recessions of the past, and more than that, most of them predicted that the economy would grow during these periods.”

After the stock market crash in October 1987, most economists predicted a severe economic downturn, but the US economy experienced strong growth in the last quarter of 1987. Basically, most economic predictions are equivalent to showing that the economic situation this year is roughly the same as this year. In fact, once they anticipate a change, the situation is likely to get worse because they are predicting the wrong direction of change.

Furthermore, neither the professionalism of economists nor the complexity of economic models can improve the accuracy of predictions. Predictions from large models based on more than 1000 formulas aren't more accurate than predictions from simple models based on just a few equations, and no matter how complex these models are, they still can't accurately predict the future. In 1995, as The Economist published the results of a competition held in 1985, a particularly persuasive test was made public. The test asked people with different backgrounds to predict the UK economy over the next 10 years. Who won in the end? A group of sanitation workers and a group of 4 multinational company chairmen tied for first place.

What we need is not a meaningless reaffirmation; if the event itself is unpredictable, then the amount of knowledge we have in our field of expertise is meaningless in predicting itself. Michael Evans (Michael Evans), founder of Chase Economics (Chase Economics), stated, “The problem with macroeconomic (economic) predictions is that no one can do them.”

What's more, when it comes to predicting the economic situation, no particular economic concept is superior to others. Forecasts are often influenced by economists' assumptions, which can cause economists to make vastly different predictions about the future economy.

In fact, the two are completely opposed to each other, but both can win a Nobel Prize. I'm afraid such a rare thing only happens in the economics community. This makes people have to believe in the so-called “First Law of Economists” — every economist has a colleague who has the opposite opinion. When different economists make very different predictions, it's hard for people to believe those predictions.

Why are economists' opinions so different? One reason may be that economics usually doesn't use scientific methods, that is, test hypotheses by observing how the economy is developing. By contrast, economists often develop complex theories that may be logically sound, but are often based on unrealistic concepts.

For example, one of the basic assumptions of economics is that people always act rationally. However, we are human beings in a psychological and social sense, and our decisions are often conflicted and erroneous. Money isn't our only driving force — we are also influenced by factors such as crowd mentality, power, love, revenge, kindness, and laziness. Have you heard the following joke about economists? Two economists walk down the street, and one of them said, “Hey, there's a dollar on the sidewalk.” Another said, “That's impossible — if there were, someone would have picked it up a long time ago.”

Given the poor performance of forecasters, some say their predictions are not only useless, but counterproductive because they will cause long-term damage to the economy. People make unfavorable financial decisions based on false predictions. Interestingly, recently, more and more people have begun to question the value of these predictions.

In fact, some companies have disbanded their sectors of the economy. However, many economists are still trying to predict the future, and the cost of producing this information that is useless to society is as high as billions of dollars. So why are we doing this? Because people have a strong desire to predict the future, whether it's predicting their personal lives or the economic situation of society as a whole.

Edit/rice