In a recent interview, Jeremy Siegel, the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania and a “Market Master” on CNBC, was praised for his ability to predict the stock market’s gains in 2013. “Thank you,” he said. “I’ve gotten quite a few media contacts and congratulations because I said in January 2012 that the Dow would finish this year between 16,000 and 17,000. I’ve learned that humility, rather than hubris, is the proper response to a good market prediction,” he added.1 The Dow Jones Industrial Average closed at 16,020 on Friday, December 6.2 This would seem like a rather definitive affirmation of Professor Siegel’s predictive powers.
But a certain amount of humility may be required, as the professor pointed out.
Turn back the clock five years, and here’s what Professor Siegel had to say in February 20083:
“There will be no recession in ‘08.”
Is that so?
“Shares should have a good year, returning 8% to 10%.”
Yes, a good year, indeed: the S&P 500 lost only 37%.
“By June, the subprime-mortgage disaster will ease.”
Too good to be true!
This is not to single out Professor Siegel or to pick on him. In an interesting study of 6,584 forecasts for the U.S. stock market offered publicly by 68 “experts,” researchers at CXO Advisory Group graded the so-called market gurus on their predictive abilities. Nobody in CXO’s study has achieved a seemingly modest forecasting accuracy of 70%, and some “experts” have showed a forecasting accuracy of just a little over 20%.4
But ‘tis the season—the season where pundits come forth with their market and economic forecasts for 2014. The contrasting success of Professor Siegel’s two predictions underscores just how difficult it is to accurately and consistently anticipate where the economy or the markets are going. Should you have taken action as a result of either of them? He is bullish now. But what if he turns bearish tomorrow? What if he’s to say, “the Dow will finish 2014 below 15,000”? What would we do then? Sell our stock portfolio and sit on a pile of cash waiting for another smart prediction? No, thanks. We will raise cash when we need it, but we won’t raise it just to sit on it. We have chairs to sit on.
What do WE think? Well, we know that it’s been a really good year for stocks so far.
Very good. Year-to-date, the broad S&P 500 index is up 29%. Small stocks in the U.S. have done even better, and are up almost 35%. That we do know.
We also know that markets are very difficult to beat. In other words, they appear to be pretty efficient. Jeremy Siegel might be a CNBC “Market Master”, but it was another professor who captured media attention (rather unwillingly) in the fall of 2013. It was Eugene Fama from the University of Chicago, one of the three 2013 Nobel laureates in Economic Sciences.
As flawed and irrational as they might seem sometimes, markets represent information about millions of actions processed by millions of investors and, therefore, are inherently much more efficient than the efforts of any individual investor.5 What this means for investors can generally be boiled down to one sentence: invest in a well-designed, broadly-diversified portfolio, and no crafty tactical moves or astute forecasting skills will be needed. It’s a relatively easy concept, but one that’s surprisingly hard for many people to understand and accept.
So even though we don’t have a forecast, we do have a simple message to convey, and today it’s no different than it was five years ago or three months ago: stay disciplined in a broadly-diversified portfolio that is designed to meet your objectives, and act when something significant happens in your life, not when some media guru tells you to act.
Vlastelica, Ryan. “Wall Street jumps on jobs; Dow, S&P, end lower for the week.” Reuters, December 6, 2013, http://www.reuters.com/article/2013/12/06/us-markets-stocks-idUSBRE9AS0ER20131206, accessed December 8, 2013.