Nouriel Roubini Misses Another Prediction

Last Updated May 20, 2011 8:50 AM EDT

On May 20 of last year, famed economist Nouriel Roubini gave another doomsday prediction about the stock market. (Remember, Roubini gained widespread fame when he predicted the recent housing crisis and subsequent market crash.) He told CNBC that stocks would shed another 20 percent due to a continued weakened economy.

With the S&P 500 Index closing that day at 1,072, Roubini warned: "There are some parts of the global economy that are now at the risk of a double-dip recession. From here on I see things getting worse." He also said cash and other such investing vehicles would be investors' best bet as stocks and commodities would both fall.

One can only imagine how much worse a bear market Roubini would have forecasted if he had known that in the next year we would:
  • Experience a serious of revolutions in the Middle East that would help drive oil prices to more than $115 a barrel.
  • The world's third largest economy would be hit by a devastating earthquake, a tsunami and a nuclear disaster.
  • The U.S. deficit commission would fail, and there would be no resolution of the fiscal crisis. S&P would provide a negative warning on the U.S's credit rating.
Over the past year, instead of dropping 20 percent as Roubini had forecasted, the S&P actually rose about 20 percent (and that doesn't include the return from dividends).

Roubini's failure to accurately predict the market should have come as no surprise. Just 14 months earlier, on March 26, 2009, with the S&P 500 having closed at 814, Roubini made this forecast: "U.S. stocks will fall and the government will nationalize more banks as the economy contracts through the end of 2009." Today, we know that despite Roubini's warning, the market had just 17 days earlier started one of the greatest bull markets in more than 70 years! You would think that this mistake would have taught Roubini a little humility when making forecasts.

Like other once famous forecasters, Roubini happened to get one forecast right at the right time, just as blind squirrels will occasionally find acorns. If you make enough forecasts, you'll eventually get some right. And if you make forecasts that are "outliers" (forecast extreme events), and happen to get one right, you're anointed a guru by the media. However, when future forecasts turn out to be wrong, there's no accountability - which allows the game to continue.

Why do people keep listening to Roubini and other gurus? Why do people continue to pay large fees for advice that has no value because so much of returns is explained by surprises, which by definition are unforecastable? The evidence is very clear that there are no good forecasters. As Antti Ilmanen, author of Expected Returns, concluded: "One must be very humble when forecasting."

Paying attention to forecasts is dangerous because they're likely to cause you to act, when inaction - adhering to your investment policy statement/asset allocation - is more likely to prove to be the right strategy. This is perhaps what led Warren Buffett to conclude: "We continue to make more money when snoring than when active."

Of course, you must have a plan in order to adhere to it!

More on MoneyWatch:
Nouriel Roubini Talks, People Listen Advice from Market Gurus? Don't Listen! Should the Treasury Stop Issuing TIPS? Rajaratnam Conviction Remind Us of Investing Dangers Investors Lose $113 Billion on Complex Investments
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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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