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Investing Predictions & Hucksters

A recent article by Dan Solin in the Huffington Post talked about TV pundits and economist who make predictions on the market for a living. Unfortunately for the pundits, Dan Solin wasn’t about to praise them. Here is an excerpt for his article, focusing on the main take-aways that investors should heed.

Predictions and hucksters

If you are relying on “astrological types” for predictive advice about the financial markets, “crazy” would be an understatement.

The ever-entertaining Jim Cramer, advised investors to abandon index funds and try their hand at market timing. Cramer offered to teach investors how to engage in this activity.

But Cramer rarely provides data to support his claims of stock picking and market timing expertise. My colleague, Larry Swedroe, reviewed several studies analyzing his stock picks. Swedroe’s conclusion was sobering to fans of the “boo-yah” man: “There’s no evidence of any stock-picking skills — his picks are neither good nor bad. In other words, it’s just entertainment.” What educational value is there in that?

CNBC (which has a lot of air time to fill and advertisers eager to generate commissions and fees) also featured an interview with RiskReversal.com’s Dan Nathan. Nathan peered into is crystal ball (which apparently is completely crystal clear) and predicted the S&P 500 index will “likely” drop to 1,900 by year-end.

It’s sad that investors continue to rely on emperors with no clothes, who make predictions about random and unknowable events. Famed author and financial journalist Michael Lewis summed it up nicely in a post on Bloomberg. Lewis noted that in order to succeed on Wall Street “…you must believe, or at least pretend to believe, that you are an expert in matters where no expertise is possible. I’m not sure it’s any easier to be a total fraud on Wall Street than in any other occupation, but on Wall Street you will be paid a lot more to forget your uneasy feelings.”

The failure of economists to predict the direction of interest rates is a teaching moment for investors. Economists have legitimate credentials, but still can’t predict random events. The likelihood that talking heads will have special insight into the future of the markets is about the same as “astrological types.”

Your best course of action is to ignore them.