I’m currently reading a very good book on how future predictions are wrong most of the times, and the author is not only talking about stock predictions, but predictions of all kinds from food shortages to oil prices to how long a war will last.
Future Babble is written by Dan Gardner and deals with how expert predictions are wrong most of the times, and how you can do better yourself.
I’m not yet done reading the book and haven’t reached the how you can do better yourself section yet, but I did want to share some particularly entertaining snippets from the book, and highlight one point that came to my mind again and again.
First, let’s look at an economic collapse prediction thankfully gone wrong:
A small library could be filled with books predicting stock market crashes and economic disasters that never happened, but the giant of the genre was published in 1987. The hardcover edition of economist Ravi Batraâ€™s The Great Depression of 1990 hit the top spot on The New York Times best-seller list and spent a total of ten months on the chart; the paperback stayed on the list for an astonishing nineteen months. When the American economy slipped into recession in 1990, Batra looked prophetic. When the recession proved to be mild and brief, he seemed less so. When the 1990s roared, he looked foolish, particularly when he spent the entire decade writing books predicting a depression was imminent.
Next a Nobel winning economist getting it wrong:
Even economists who win Nobel Prizes have been known to blow big calls. In 1997, as Asian economies struggled with a major currency crisis, Paul Krugmanâ€”New York Times columnist and winner of the Nobel Prize in 2008â€”worried that Asia must act quickly. If not, he wrote in Fortune magazine, â€œwe could be looking at a true Depression scenarioâ€”the kind of slump that sixty years ago devastated societies, destabilized governments, and eventually led to war.â€ Krugmanâ€™s prescription? Currency controls. It had to be done or else. But mostly, it wasnâ€™t done. And Asia was booming again within two years.
Finally, a funny one about the stock market prediction.
Another bull market, this one in the late 1990s, produced a bookshelf full of predictions so giddy they made Irving Fisher sound like Eeyore. The most famous was the 1999 book Dow 36,000 by James Glassman and Kevin Hassett. â€œIf you are worried about missing the marketâ€™s big move upward, you will discover that itâ€™s not too late,â€ Glassman and Hassett wrote. Actually, it was too late. Shortly after Dow 36,000 was published, the Dow peaked at less than 12,000 and started a long, painful descent.
The point I’d like to make about this is how some people get all worked up and excited after they read an article on a particular subject, and form an opinion on something just by listening to one person, or reading one or two articles on a topic.
I come across a lot of arguments in the nature of it must be right because an authority on the subject said so.
I think people fail to see that for almost every topic, you will have many smart people take one side, and as many smart people take another.
At the very least you need to dig a little deeper and see if the argument that the person is making appeals to you, and then acknowledge that there is room for error. I once jokingly told a friend who used to idolize George Soros that you are buying gold while Soros is selling it, and he said “but he is just one man”.
I really liked that line – he is just one man and you are looking at just one of his ideas – he is not god and can be wrong.
If my argument is just that one man is betting against your idea then I don’t have an argument at all.
This ties in to coat tail investing as well where investors see what big players are buying and then go ahead and buy that same stock.
I think looking at what big investors are buying is a great source of screening stocks, but that doesn’t make it infallible. The stock can still go down, and if you buy too much of it you are still taking a risk. You must still be cognizant of that risk, and not go all in with your purchase.
The next time you get all worked up reading an article – take a deep breath and say to yourself – but it’s just one person!
Also read Who should you listen to?
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