At the end of every year, it is the peeve of every “expert” analyst to try and forecast what will happen next year. This applies to the field of politics, economics, world events and almost everything.
However, there is little accountability, and very few people examine whether any of the so-called experts are right.
Let’s remember some events which happened in 2011, which no one ever predicted: NATO would go to war against Libya, a massive tsunami would devastate Japan, there would be uprisings in many Arab countries, and Europe’s economy would be close to its death.
This is important because many economists and money managers are already trying to predict what will happen in 2012 and give their investment advice based on that. This is very dangerous, since no one can predict the future.
Looking through some old articles, it is astonishing how wrong some of the big stock forecasts were. Just one of dozens of examples: Goldman Sachs, considered the most prestigious bank in the world, predicted that European stocks would rise 20 percent in 2012. While the year is not over, European stocks are down approximately 10 percent. Additionally, Europe looks like it is about to implode.
If an investor had listened to Goldman Sachs, they would have had a 30 percent difference between their respected returns and actual returns.
Other “experts” were nearly as bad. Goldman Sachs was not the only culprit here: 13 strategists cited by Bloomberg, expected European stocks to climb 12 percent.
It is important for investors to realize why this happened, in order not to fall into the trap of trying to predict the future. So what are the reasons for everyone being so dead wrong?
• Wall Street thinks like a herd. When things are going well, as they appeared to be in late 2010, everyone predicts it will continue.
• Even when things are bad, most banks try to stay bullish. As a friend pointed out: If Morgan Stanley manages $1 trillion, do you expect them to call for the market to drop 20 percent? That would mean a $200 billion loss in assets for the company.
• People in general are overconfident. Everyone likes to think they are the next Warren Buffett, but few in reality are.
During the next few weeks, readers will view dozens of forecasts for 2012.
The best advice is to ignore the noise and focus on picking quality stocks. Quality stocks like Pfizer, Coke, and Johnson & Johnson are pretty cheap now, and offer low risk, to the risk-averse investor.
(The author owns Pfizer shares.)
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