Market analysts are most of the time wrong with recommendations and price targets.
Football, just like the stock market, is a highly unpredictable activity. But that did not stop Goldman Sachs from trying to predict the 2018 FIFA World Cup final winner. Drawing from its international pool of strategists, the bank used machine learning to run 200,000 models, mining data on team and individual player qualities, to help forecast specific march scores.
It then simulated a million variations and picked a winner of the tournament. It initially forecast a final between Brazil and Germany, with Brazil expected to ultimately win. However, as the group stage neared its conclusion, they changed the forecast to an England and Brazil face-off, with the latter still winning. Needless to say, this stupid prediction flopped.
But Goldman is not alone. Yours truly has played this humiliating game before. Recently, someone reminded me of a conviction ‘buy’ rating I gave a few years ago to a listed cement company. Call-to-date, the stock has lost over 95 per cent of its value. Still a pure disaster. But I have re-learnt this lesson; prediction is for fools.
Market analysts are nearly always wrong with recommendations and price targets. Predicting the future with any consistency or precision is impossible.
But who cares, the industry keeps chugging along. Not a day passes without someone making a bold prediction about what stocks would do well. Putting out earnings estimates remains in vogue; you beat them, you are a leader. You don’t, you’re laggard. Who set us up on this high horse?
Clearly, a “better way” is needed. Someone suggested to begin from a familiar place; “past performance is not an indicator of future success.” Ever read that line? What if the opposite is true? What if past performance is indeed an indicator of future performance? What if markets do repeat themselves? Perhaps you’ve heard that before but there’s some truth there. That markets are truly cyclical in nature. That some securities/asset classes tend to outperform others because their business models are aligned with conditions for growth. That when investors see “A” happening, they should expect “B” to follow. No predictions. No educated guesses. Just following cycles.
But trend following is boring? Intellectually unfulfilling. But who cares? The aim is to make money, not to be right. The job is to systematically sift price data to find trends and act on them and not to be clever with models. That’s the way to approach the markets; with humility and reverence. Far from heresy, extensive studies on cycle-following strategies has proved them as robust for extended periods of time.
To bring this to a close, here’s the main takeaway: humans stink at forecasting. Even the most failsafe predictions are bound to fail in the long run. It’s a losers’ game. Ending this on a biblical note, remember the lesson from the fig tree (Mark 13): “as soon as its twigs get tender and its leaves come out, you know that summer is near.” Let the markets say amen.
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Note: The results are not exact but very close to the actual.
