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Addiction to Prediction

It’s that time of year again. In the coming weeks, financial publications and gurus will release their hot list of stocks to buy, the best mutual funds, which sectors are going to out perform the market and which ones to avoid, and on and on. And, with all the upcoming holiday parties, I am sure to receive questions about my outlook on the market and whether it will go up or down. (Since I’ll be celebrating the holidays, I’ll simply stuff my face with a tasty morsel or down another beverage.)

Investors are driven by the innate human need for emotional and psychological security. Randomness is terrifying and creates discomfort. Investors want to believe that they or someone else knows what's going to happen next year. As such, they buy the hot lists and listen for hot tips. Some even pay substantial sums of money to those who claim to know what the future holds.

Before you spend your hard earned money for these hot lists and publications, let’s review the actual results of some of the best and brightest forecasters on Wall Street.

For the last 10 years, economist Fritz Meyer has tracked the results of 10 of the most respected and highly compensated market strategists on Wall Street. The table below shows the strategists’ S&P sector picks (noted with ‘+) and pans (noted with ‘-‘’) for 2012.The strategists predicted that technology (+9) would be the top performing sector and financials would be the worst (-5). Through November 8, 2012, technology ranked 5th out of 10 and financials has been the best performer.


This table shows the strategists’ sector picks and pans for 2011.2 Again, the strategists collectively did poorly. They predicted that technology would be the top performer (+8), and that utilities (-6) and healthcare (-5) would be the worst. Utilities was the best, healthcare the 3rd best and technology ranked 6th out of 10.


Similarly, the strategists did poorly in 2010. If you followed their advice in any of these years, you would have lagged behind the S&P 500. The report cards show clearly and consistently that these “experts” get it wrong. These forecasts are virtually worthless. I say virtually because they provide good entertainment value.

You would have been better off by indexing. That’s bad news for investors who follow this approach. The good news, there is a better approach to investing. Before you rush out and spend your hard earned money for these financial publications, be aware that at the bottom of the ads and hot lists, you will see the disclaimer, “past performance is no guarantee of future results." 

 So consider this! Now may be the time to think about the advantages of a passively structured investment strategy built on over 60 years of real financial science.


1. Barron’s. Published Dec. 19, 2011.

2. Barron’s. Published Dec. 20, 2010.

How Good Were the Hot Stock Picks for 2012?
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