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What to Make of All the ‘New Year’ Stock Predictions?

New Year

What to Make of All the ‘New Year’ Stock Predictions?

Another new year adds another year of so many so-called gurus with stock predictions. Whether it’s a newsletter, Morningstar research, brokers, fund managers, and news readers everyone seems to have their hot tips are ahead.

So, which do you follow, do any work? What are their chances of success?

Is this any evidence that picking a few stocks is a smart way to invest anyway?

Step 1

Before you blindly follow one of these tips and buy the shares, it’s worth looking at their previous track record.

Go back to this time last year and find the same forecaster and see how they went for the year. Did their picks perform better than the market?

Questions I would ask before investing money using their tips;

  • Do they manage funds or is this just their thoughts?
  • If they do manage funds, do they manage for other people via a registered managed fund or exchange traded fund?
  • Is that fund publicly available to retail investors with proper regulation and protection for investors?
  • How did their tips go last year? The year before? For at least 10 years?
  • How long have they been managing money?
  • Can you access their performance data for at least 10 years?
  • Has the fund added value over that time
  • What are the costs?
  • What is the risk?
  • Is this an investment that suits your profile?
  • Can I do just as well (if not better) buying a low-cost fund?

The list could go on, but the above should provide a reasonable criterion as to whether you should invest or not.

If you can comfortably answer all of the above and still feel that these “tips” are worth following then at least you have followed a process.

Step 2

Look at the evidence of data that tracks the success of otherwise of stock pickers. This is freely available or accessible via an Independant adviser.

Articles by Jim Parker at Dimensional for example regularly look at the past “forecasts” and track how they went. In his recent article “The Year That Wasn’t’ published Dec 5 2022 Jim cites many examples of forecasts that were very wrong. He states “One can make assumptions about the future. But as we have seen many times over the years, unexpected things can happen – wars, pandemics, inflation, recessions – that mess up even the most carefully considered projections”.

Basically, for an investor its common to believe that someone out there has the crystal ball and therefore you should follow them to get better returns.

But remember, it’s very easy to make forecasts. It’s very difficult to consistently add value by stock picking.

Unfortunately, the evidence and data over time show this not to be true.

Standard and Poor’s via their SPIVA website publish the performance of managers and track the data.









(Reference SPIVA | S&P Dow Jones Indices (spglobal.com))

Fama and French;

Fama and French are two of the most recognized academics in this pace and over decades have illustrate the point that active management arithmetically is a fallacy and that:

“Many experts characterize the current environment as a “stock picker’s market.” Is there any evidence that stock selection is more successful under certain market conditions?

EFF/KRF: They can’t be experts since, as Bill Sharpe pointed out in 1991, this is a fallacy of arithmetic. In aggregate, investors hold the market. This means that, before fees and expenses, the alpha for investors as a whole is always zero. Our recent mutual fund paper says that, in aggregate, passive mutual funds nail their benchmarks: their aggregate alpha is zero. If this is true for passive investors more generally, it implies that the aggregate pre-cost alpha of active investors (stock pickers and other types) is also always zero–regardless of market conditions. Active investors can only win at the expense of other active investors.”

Reference; https://famafrench.com

Step 3
Read more about investing and decide what is right for you. What your friend’s tips are or what they are doing is irrelevant to your goals. What a stock picker in an article says is also most likely relevant to what you require.

Do the research and look at the facts and you can invest very successfully, and also not worry too much!

It’s your super and is major asset for you so Scientiam (or knowledge) is imperative to improving your retirement.

Nigel Baker

CEO & Founder of Scientiam