Who are the most (least) accurate stock gurus?

(MoneyWatch) The financial media tends to focus most of its attention on stock market forecasts by purported investment gurus. They do so because they know that's what gets the public's attention. Investors must believe they have value or they wouldn't tune in. Nor would they subscribe to investment newsletters, nor publications like Barron's that claim to provide you with "news before the markets know."

Unfortunately for investors, there's a whole body of evidence demonstrating that market forecasts have no value (though they provide me with plenty of fodder for my blog) -- the accuracy of forecasts is no better than one would randomly expect. For investors who haven't learned that forecasts should only be considered as entertainment, or what Jane Bryant Quinn called investment porn, they actually have negative value because forecasts can cause them to stray from well-developed plans.

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The latest piece of evidence illustrating the futility of forecasts comes from CXO Advisory Group. The investor research firm set out to determine if stock market experts, whether self-proclaimed or endorsed by others,  provide useful guidance on how to time the stock market. To find the answer, from 2005 through 2012 they collected and investigated roughly 6,600 forecasts for the U.S. stock market offered publicly by 68 experts, bulls and bears employing technical, fundamental and sentiment indicators. Their collection included forecasts, all of which were publicly available on the Internet and which went back as far as the end of 1998. They selected experts based on Web searches for public archives with enough forecasts spanning enough market conditions to gauge their broader accuracy.

CXO's methodology was to compare forecasts for the U.S. stock market to the S&P 500 index returns over the future intervals most relevant to the forecast horizon. They excluded forecasts that were too vague and forecasts that included conditions requiring consideration of data other than stock market returns. They matched the frequency of a guru's commentaries (such as weekly or monthly) to the forecast horizon, unless the forecast specified some other timing. And importantly, they took into account the long-run empirical behavior of the S&P 500 index. For example, if a guru said investors should be bullish on U.S. stocks over the year, and the S&P 500 index was up by just a few percent, they judged the call incorrect (because the long-term average annual return has been much higher). Finally, they graded complex forecasts with elements proving both correct and incorrect as both right and wrong (not half right and half wrong).

The following is a summary of CXO's findings:

There were many well-known forecasters among the "contestants." I've highlighted 10 of the more famous, most of whom I'm sure you'll recognize, along with their forecasting score.

Of course, there were a few with fairly good records. But only five of the 68 gurus had scores above 60 percent (among them was David Dreman with a score of 64 percent), yet 12 had scores below 40 percent. It's also important to keep in mind that strategies based on forecasts have no costs, but implementing them does.

The bottom line is that the research shows that whether it comes to predicting economic growth, interest rates, currencies or the stock market, the only value of gurus is to make weathermen look good.

Keep this in mind the next time you find yourself paying attention to the latest guru's forecast. You're best-served by ignoring it. As I point out in my latest book, that's exactly what Warren Buffet does himself and what he advises you to do -- ignore all forecasts. They tell you nothing about the direction of the market, but a whole lot about the person doing the predicting.

Image courtesy of Flickr user Images_of_Money

[LarryswedroeCBS]

Judy
The best advice I can give him is to read Wise Investing Made Simple. If he has an open mind the book will change forever the way he thinks about the market. The odds of your son outperforming a risk adjusted benchmark over the long term are so low that only fools play, unless it's entertainment money which should not be more than a few percent of the portfolio.

Ask your son the following questions? Exactly who is he exploiting when he trades, who is his victim? If he buys a stock there is a seller. The odds that the seller is an institutional investor who knows far more about the stock are about 5-10:1. He is buying because he thinks it will outperform, but the seller is selling because they think it will underperform. And even BEFORE costs only one can be right. Now who is that likely to be, your son or the sophisticated institutional investor? Who likely knows more?

And same thing when he sells. I would bet your son has never thought about who is on the other side of the trade. Ask him,

Old saying, at the poker table if you don't know who the sucker is, it's you.

Get him the book!! And read it for yourself

Best wishes
Larry

[fuwafuwausagi]

Bob Brinker is interesting because he essentially has been a buy and holder. His last exit was in 2000, i.e. he rode the great bear down and all the way up.

Frankly given what was written I am surprised Brinker was rated as he was. His only call in the last decade plus was to get in and get out both prior to 2005, the period under study. So he was 100% invested - period.

Perhaps they need to review their methodology.

[LarryswedroeCBS]

Judy
Everyone can predict, the question is can they predict accurately. The problem is most investors base their investment decisions on their forecasts (or some experts). They end up focusing on the only thing that they actually cannot control, returns. Instead one should focus on the things you actually can control, the amount of risk you take, diversifying those risks as much as possible, keeping costs low and tax efficiency high, and the amount of saving/spending we do (and learn to ignore market forecasts)

Best wishes
Larry

[judymar14]

My son go into the stockmarket last year. He watches it every day, sells and buys at least once a week. He also listens to one of the gurus on tv. He started out good last year and was 20% ahead at the end of the year. The last six weeks haven't been too good. When a stock goes up he bought then sold he says he's learning. I would like to say you can learn by making (winning) money just as well. But being the nice mom I am, I say nothing and let him go on about how/when/why to play the stockmarkent.

Just reading your paragraft I can tell you know what you are talking about. Wish you could have a talk with him.

Thanks for you info.

[judymar14]

No one can predict the stockmarket. Try the roulette table, you'd have a better chance to win.