The incomparable James Montier–once of SocGen, soon of GMO–blasts the Efficient Market Hypothesis (EMH) in a recent speech (via John Mauldin). Let’s leave the EMH aside for a moment and just focus on one simple point.
Most investment economic analysis is devoted to forecasting the future. Unfortunately, the evidence is in…and it’s clear that people can’t forecast the future.
In my opinion [trying to forecast the future] is one of the biggest wastes of time, yet one that is nearly universal in our industry. Pretty much 80-90% of the investment processes that I come across revolve around forecasting. Yet there isn’t a scrap of evidence to suggest that we can actually see the future at all.
For example, the following chart shows how good economists are at forecasting GDP.
Note that, year in, year out, the forecasts stay very close to the average GDP growth rate. Of course, everyone knows that the economy is cyclical, so forecasting this way is absurd. But economists simply have no ability to forecast the turns:
And how about stock analysts? How are analysts at predicting how stocks will do over the next year?
Analysts just pick targets that are close to the average annual return for the average stock in recent years–then cross their fingers and pray. Of course, stocks are cyclical, too. And once again, analysts have no ability to call the turns.
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