Investing in 2012: Get ahead of forecaster folly
By Barry Ritholtz,
January 1, 2012


The new year has arrived, and so investors are inundated with all manner of lists: Best and worst stocks for 2012, forecasts of where the economy is going, favorite investments for the year and more.What’s an investor to do? You should start by ignoring those lists. Let’s conduct a little experiment to demonstrate why: Do a quick Google search for “where to invest in 2011.” I read through the first dozen or so. For the most part, the performance was pretty awful. Before the excuse-making starts — 2011 was an unusual year, the ECB/Fed intervened, etc. — let me clue you in to this fact: Forecasters are pretty awful every year.

Whenever I see one of those “Buy this now for the new year” columns, I diary them in my calendar or use the free Web site A year later, I look back at these recommendations and forecasts, and, for the most part, they’re terrible.

Because of this folly of forecasting, I try not to make many predictions. Whenever I am asked where the economy is going, who is going to win that year’s elections or what the markets are going to do, I steal a trick from the weatherman: Always couch your forecasts in probabilities. That way, when I am wrong — and anyone who pretends to know what will happen in the future will frequently be wrong — at least I can declare the outcome was an anticipated probability.

“As we stated last January, there was a 10 percent chance that the Federal Reserve’s Hobbensobbers were going to be trounced by the bond market’s Rebblesacks — and that’s exactly what happened!”

It’s a great cheat to avoid saying silly things in public that could come back to haunt you.

These are my 10 forecasts as to what the forecasters will be forecasting for 2012:

1 Stocks will trounce bonds this year: We heard this one a lot in 2010; it turned out to be wildly wrong. Stocks were flat in 2011, while bonds gained about 13 percent. Indeed, turning conventional wisdom on its head, bonds have outperformed stocks the past one, 10 and 30 years.

Hey, maybe stocks will beat bonds next year. If you keep making the same prediction, eventually it will come true.

2 Housing has bottomed: A perennial favorite from the usual suspects, who have been consistently, insistently and persistently wrong about this since residential real estate peaked in mid-2006. As the most recent Case-Shiller data show, home prices fell another 3 to 4 percent in 2011. From prices that remain too high to an excess of inventory to slow household formation, there are many reasons the bottom has not yet occurred.

3 Election forecasts: In politics, six months is a lifetime. Just look at how often the poll leader has shifted in the Republican nomination race over the past six months. Making a forecast 11 months out about politics is sheer folly. But consider: Lots of people will make forecasts about who will win the primary, what the final tickets will look like, who needs to win which states to gain how many electoral votes. The sheer number of forecasts means that someone will, if only by chance, get it right.

4 Buy these 10 stocks: You must buy THESE 10 stocks — not those 10 stocks or even these 10 stocks, but THESE 10 stocks. Looking back at all of these lists, it is surprising more people didn’t get something right, if only by accident.

The question investors should be asking themselves is why am I buying stocks at all and not simply indexing? Answer: Makes for too short an article.

5 The economy is better than the data suggest: We see this over-optimistic discussion every year. It is consistently wrong. If anything, data about the economy tend to overstate growth, employment and sales while understating inflation.

There is a period when the economy is better than the data show it to be: At troughs, when a long downturn is reversing itself. Are we at that sort of a juncture? Considering it has been nearly three years since the market lows of March 2009, and 30 months after the recession ended in July 2009, that hardly seems to be the case. The economy was better than the data implied in mid-2009, not today.

6 The Apocalypse is coming! This is the over-pessimistic view. Yes, we know, the end is near. You tell us this year after year, and it is terribly tiresome. After the Apocalypse, you have full license to say “I told you so.” Until then, please go away.

7 Banks will come roaring back: My favorite terrible forecast for 2011 was “Buy the Banks” (NYSE: XLF); a variant was “buy Bank of America” (NYSE: BAC). And just how well did that work out? The financial sector was among the worst performers of the S&P in 2011. In a year when markets were flat, financials fell 20 percent. As to Bank of America, it collapsed 60 percent, in percentage returns, the worst forecast of the year.

Every year some value managers come out pounding the table on whatever sector got beat up that year, regardless of the reasons for it. They are always sorry to learn that mean reversion is not tied to a calendar.

8 Hyperinflation: During the 2000s, we hardly heard forecasters say much about inflation. You might recall that during that decade, oil rallied from $20 to $147, foodstuffs skyrocketed, and education and health-care costs had double-digit annual gains.

Post-credit crisis, the economy has been in a deflationary mode. Asset prices are flat-to-negative, labor utilization is way below trend, and demand for goods and services remains soft. No matter how much money central banks print, these are not the factors that lead to Weimar Republic-like hyperinflation.

9 Buy gold: On a related note, the gold bugs got some comeuppance this year. As of mid-August, gold had gained more than 33 percent year to date (according to the gold-tracking ETF: NYSE: GLD). But the enthusiasm for the trade got way ahead of itself, and gold lost more than a quarter of its value, with GLD falling $46.59. After a spectacular decade of gains, the shiny yellow metal failed to achieve gains of even 10 percent in 2011 and was outperformed by bonds.

10 Buy emerging markets: Mulligan! This was another favorite forecast for 2011, and it was wildly wrong. China and Hong Kong were down 20 percent; India and Brazil were off by a third. The decoupling thesis never goes away — that despite the interconnected global economies, some regions will do well even when their biggest trading partners slide into recession.

The key thing you should remember when it comes to investing is that nobody truly knows what tomorrow will bring. Nobody. These predictions are, at best, educated guesses. Yesterday’s predictions are undone by tomorrow’s news. Circumstances change. New economic data are released. Unanticipated events unfold.

All good reasons to avoid forecasts altogether.


Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. He previously discussed this subject in The Folly of Forecasting on 06/07/05.

Category: Apprenticed Investor

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “Getting Ahead of Forecaster Folly”

  1. rktbrkr says:

    The trend is your friend?

    Investors pulled money out of U.S. equity mutual funds for a ninth-consecutive week despite a bullish 2012 outlook from Wall Street and a December rally that’s carried over into the New Year.

    U.S. funds lost $1.1 billion in the week ended Wednesday, according to data from Lipper FMI. This follows a $1.7 billion outflow in the previous week. Investors put money into taxable and municipal bond funds instead

  2. nice Reminder, BR~

    and, toward your Point(s)..

    yet, another Year commences without..


    While this strategy can offer limited protection from a decline in price of the underlying stock and limited profit participation with an increase in stock price, it generates income because the investor keeps the premium received from writing the call. At the same time, the investor can appreciate all benefits of underlying stock ownership, such as dividends and voting rights, unless he is assigned an exercise notice on the written call and is obligated to sell his shares. The covered call is widely regarded as a conservative strategy because it decreases the risk of stock ownership.

    Ye, if peep, merely, learned how to ‘Roll their Own’…

    or, maybe, better, if they, merely, wondered why such a Strategy is not available to them–in the majority of their ‘Savings’ vehicles…

  3. Petey Wheatstraw says:

    RE: The Apocalypse coming:

    All of the damn naysayers should just shut the F up! Why, I‘ve been eating these shiny purple berries for a couple of days now, and they haven’t kil . . . urk!

    We are on a one-way street to the ghetto. The destination might not be the apocalypse, but it ain’t Sunnybrook Farm, either.

  4. Sechel says:

    Re inflation, you pretty much acknowledged it yourself…
    Asset prices are deflating(homes) while basic necessities such as Food & Energy, Health Insurance along with Education went up/are going up. Add to that a soft economy which limits wage increases and you have inflation in inelastic demand items the brunt of which are being borne by the working class along with retirees. The very rich often have ways to maneuver inflation, so all this talk about inflating the economy are very dangerous. And even if the CPI is not going up double digits, it does under-state the price level as John Williams has written about so often.

  5. Arequipa01 says:

    Predicting events is impossible, obviously. Anticipating behavior(s) is feasible.

    So, keep in mind the following assertion from Michael Burry:

    “”it is not a time for a responsible individual to tolerate any level of blind faith directed toward any man or woman. It is absolutely not a time to follow.”

    The leadership (political and criminal coprophagists like the Koch-lichen Bros) in this country have one solution- drive everything into the ditch, reinstitute slavery and make the slaves drag the Hummer out of the mud. Their behavior is predictable and unfortunately so is the craven stupidity of the mass of Americans.

    Here’s an example of the parliamentary behavior of Boozeboy Boehner and his Weeping Rethuglicans*:

    “For the second time in recent weeks, C-SPAN’s video on Friday morning cut away from high drama in the U.S. Congress as Democrats demanded to be heard, only to see their session immediately shut down by Republicans.

    In another so-called “pro forma” session, or a session of Congress staged merely as formality in order to block presidential recess appointments, the House of Representatives was gaveled in on Friday and immediately gaveled out again, even as Democrats took to the floor demanding to know where their Republican colleagues were.”

    *Democrats are morons and thugs and fully committed to effing everything up- they just aren’t such f^gs about it. See Eric Cantor and his imbecilic devotion to lies on Sixty Minutes.

  6. Jojo says:

    Yesterday’s predictions are undone by tomorrow’s news. Circumstances change. New economic data are released. Unanticipated events unfold.
    And don’t forget those unknown unknowns…

  7. dancingdiva says:

    Great read, Barry! Considering we still have disagreements about explaining the past, it’s amazing so many insist on forecasting the future.

  8. CANDollar says:

    I learned the following three principles of risk management that have served me well:
    1) Know what you own and how it behaves
    2) Anticipate regret – see Kahneman’s work
    3) Use scenarios not forecasts

    I use three, sometimes two, sometimes 4 scenarios that have some fundamental and technical basis.

    I then assign probabilities to them based on my own understanding of finance and economics and those of institutions that are relatively conservative. I also assign a metric of how different asset classes would perform under each scenario, based on historical performance.

    Asset allocation is then tactically modified from my base case after the matrix of potential outcomes and their probabilities are multiplied together. The allocation is not optimal, hence the anticipation of regret, but it may possibly be the better than forecast based, given the weight of evidence.

    The most recent scenarios I am using are based on ideas from The Economist:
    4 scenarios:
    1. Goldilocks – debt problems solved. Economy grows and debt is reduced. Growth and moderate inflation.
    2. Rapid inflation – but this inflation could be low if growth is slow
    3. Disaster – Greece defaults, banks lose capital, no firewalls around other debtor nations, Euro breaks up, GDP falls tremendously. Bonds rise, equities fall significantly
    4. De-leveraging – long period of slow growth, more frequent recessions, low inflation. Bonds are already pricing this in to a large extent.What will do well? Corporate bonds including high yield.

    What does well in each scenario?
    Growth and moderate inflation: bond yields rise so not bonds, dividend growth stocks, small caps, commodities, REITs
    Inflation due to money printing: TIPs, commodities, REITs, Cash
    Contraction and Disinflation: Bonds, Cash
    Slow Growth: Corp Bonds, High yield bonds, cash, balanced (bonds/dividend growth equity)

    The most simple version of this is a two scenario, three asset class matrix: growth or recession, cash/stock/bonds

  9. carleric says:

    Hussman is one of the very few smart guys I pay any attention to at all…here is his latest observations:

    “Happy New Year. We enter 2012 with a great deal of hope, but our hopes are not for more bailouts, or money printing, or any of the myriad policies that investors seem to hope will save bad investments and sustain elevated valuations. Instead, our hope is that in 2012, the market will finally “clear,” in the sense that bad debt around the world will be recognized as bad and restructured; that overleveraged financials will be taken into receivership instead of forcing austerity on every corner of the global economy in order to make them flush again; that rates of return will rise enough to compensate and encourage saving – and high enough to encourage borrowers and other users of capital to allocate the funds productively. Of course, in order to restructure bad debt, someone has to accept a loss. In order for rates of return to rise, valuations must decline. In short, our hope is for events that will unchain the global economy from an irresponsible past and open the gates toward a prosperous future. Maybe that is too hopeful, but we are not entirely convinced that bailouts and ‘big bazooka’ will be as easily procured in the year ahead as a confused public has allowed in recent years.”

    – John P. Hussman, Ph.D. (

  10. jd351 says:

    BR, I love the low cost index funds. I know how boring, but its works for me.

  11. The Great Unknown says:

    Where do you get off inviting me to comment, I mean 4 out of 5 dentists think forecasts are helpful, there’s no need for your war on everything including forecasts, and surely you can see that forecasts will evolve to be better over time. Also, I can’t believe you think that forecasting the weather is so easy. That’s why white cats prefer milk from a pan

  12. blackjaquekerouac says:

    “war” has been for forecast since the moment Lehman collapsed. the evil one’s have not disappointed either attacking special forces veterans with a gusto only the Gestapo would be proud of. soon “they will be on board” too. it is what they wanted after all.

  13. Onthemoney says:

    Well-founded forecasts can be useful in unexpected ways. If we’d listened to Doug Kass’s forecast of a flat stock market in 2011, we could have faded the extremes.

    This year I’m forecasting the flipside – a binary outcome for stocks – yet we’re sitting at the center of the yearly range.

    Sometimes a forecast can be less specific, but more valuable.

  14. Sechel says:

    Reading and reacting to the forecast lists is sheer folly, but reading and listening to the logic and argument behind the world views of key economists , portfolio managers, etc can be very worthwhile. Listening to Mike Pettis talk about China changed my view of world markets, inflation and the future of China. The key is learning from other with the goal of improving one’s financial acumen.

  15. [...] Getting Ahead of Forecaster Folly from @ritholtz [...]

  16. Frwip says:

    Forecasts are a foolish thing do so I’ll offer mine.

    I’ll mostly parrot Hussman and otherwise I’m mildly optimistic. Not that things are great but it looks like most of the disaster has been priced in or on its way to be slowly accounted for. The known unknowns are AFAIK few and modest and everybody is aware of the big stuff, at worse in a willful denial mode.
    - Real estate has crashed. It may (will) go lower but not another 30 or 40% in less than two years.
    - Bonds don’t have that much higher to go. You can’t do much better than zero.
    - Credit de-leveraging and consumer retrenchment is here and backed in the landscape. The retailers have been caught with their pants down once again but that’s not surprising either. Perennial optimists.
    - Greece has already defaulted for all practical purposes.
    - Even the ECB seems to have realized it needs to behave like a proper central bank if it wants to still have a currency to administer by the year 2015. Nothing like the perspective of ultra-rightwing nationalistic governments all over the map to focus the mind of hapless bureaucrats.
    - Everybody now knows that emerging markets are not a panacea or a promised land.
    - Same goes for China.
    - About the financial sector, the big factor will be a secular change in attitudes towards credit in the US (and Europe). A lot of people have been badly scarred by the past decade and will never forget it. Neither will their kids who saw their parents raked by stress, lose all sleep if not the house and age prematurely because of debt.

    I’m sure there is yet another enormous oh-crap monster lurking somewhere in a dark corner that I don’t have the faintest clue about but baring any major cataclysm – a really hard landing in China, politics, war, another neutron bomb cooked by Wall Street, the usual random asteroid – 2012 will be just one more year of slow, grinding unwinding and shoveling of the steaming pile of manure left from the 00′s decade. Not much to get exited about, one way or another. And markets will be all over the place, depending on the direction of the wind and the age of the captain.

    Hopefully, 2012 will be the year of meh.


    Yes. Finally, biflation, that odd duck, is here.

  17. DiggidyDan says:

    Dude you missed the boat. Bifurcated reflation has been here. When China and emerging crash, commodities are toast. Only thing driving the new reflation would be more money printing, and the eurozone seems more fractured and less likely to follow us yanks due to different ingrained nationalism feelings and a penchant for austerity. ‘Merica won’t print much more due to political pressures and the fact that our shit sandwich with jelly is better than Europe’s regular shit sandwich and emerging’s “oh, shit nobody’s gonna buy our cheap shit!” Epiphany. Dollars dominance for the next few years, buy property at ridiculous lows, and keep enough cash to get the deals at the end of the secular bear before it takes off again.