The Smartest Things Ever Said About Market Forecasting

Last Updated Nov 16, 2010 12:20 PM EST

After yesterday's post, a friend of mine pointed out a great little nugget in The Wall Street Journal from last week. At the beginning of the year, economists were predicting that the federal funds rate would be around 1 percent by the end of the year. Now, they're forecasting it at 0.14 percent, which is about where the Fed has had the rate since the end of last year.

It got me thinking about all the quotes I've collected over the years about the "wisdom" of market forecasters. Here are some of the best, in addition to the ones we ran yesterday. Pay particular attention to the ones from Federal Reserve chairman Ben Bernanke.

Ben Bernanke "As an economist and policymaker, I have plenty of experience in trying to foretell the future, because policy decisions inevitably involve projections of how alternative policy choices will influence the future course of the economy. The Federal Reserve, therefore, devotes substantial resources to economic forecasting. Likewise, individual investors and businesses have strong financial incentives to try to anticipate how the economy will evolve. With so much at stake, you will not be surprised to know that, over the years, many very smart people have applied the most sophisticated statistical and modeling tools available to try to better divine the economic future. But the results, unfortunately, have more often than not been underwhelming. Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect. In some ways, predicting the economy is even more difficult than forecasting the weather, because the economy is not made up of molecules whose behavior is subject to the laws of physics, but rather of human beings who are themselves thinking about the future and whose behavior may be influenced by the forecasts that they or others make. To be sure, historical relationships and regularities can help economists, as well as weather forecasters, gain some insight into the future, but these must be used with considerable caution and healthy skepticism (emphasis mine)."

Benjamin Graham "If I have noticed anything over these sixty years on Wall Street, it is that people do not succeed in forecasting what's going to happen to the stock market."

Warren Buffett "We have long felt that the only value of stock forecasters is to make fortune-tellers look good. Even now, Charlie (Munger) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children."

William Sherden "Economists' forecasting skill is about as good as guessing. Even the economists that directly or indirectly run the economy (the Federal Reserve, the Council of Economic Advisors, and the Congressional Budget Office) had forecasting records that were worse than pure chance."

Laurence Peter "An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today."

John Liscio "Forecasters, by definition, are biased and untrustworthy recorders of current economic events. In other words, they tend to uncover evidence that supports their forecasts, and they ignore or analytically dismiss anything that challenges it. And, even if the headline data appear to contradict their disclosure of the universe, they will undoubtedly uncover some statistic or extenuating circumstance that dovetails neatly with their worldview."

J. Scott Armstrong (My personal favorite) "No matter how much evidence exists that seers do not exist, suckers will pay for the existence of seers."

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Hear Larry Swedroe discuss current investment trends and topics every Sunday at noon on 550 AM KTRS in St. Louis or streaming via the KTRS Web site. Can't catch the show? Download the podcast via www.investmentadvisornow.com or through the Buckingham Asset Management podcast page on iTunes.

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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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