CXO Advisory did a very bold and lengthy study on prediction accuracy in the financial markets.
They collected 6,582 Wall Street predictions between the period of Dec-98 and Dec-12. How well did the gurus fare in aggregate?
Drum roll please….
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The gurus were accurate with 46.9% of their predictions! It seems like we are better off flipping coins to decide the direction of the stock market. Below is the chart from CXO Advisory:
The table below shows the individual guru’s prediction performance.
Do you have your favourite guru in the table?
I said CXO was brave to publish these results on their website because they received many hate mails from some of the gurus. CXO candidly dedicated a webpage of rebuttals and here is an interesting one from Jim Cramer:
Subject: You have got to be kidding me
There have been so many numerous audits of me and I also have an extended audited track record that shows you could not be more wrong. But you know what? Let the market decide. Do you think if I were as bad as your records show, I would ever have been able to
a. make $100 million in the market investing for myself,
b.have a show that has gained in audience at the time when you say I have done poorly, and
c. started one of the few FINANCIALLY successful websites out there in part because of subscribers to my newsletter and columns?
Here’s where I think your methodology goes wrong. I repeatedly recommend the same stocks from my own recommended list: NYX, SHLD, GOOG, MA, TM, CSCO, AAPL, GS, BA, JNJ, MO. I do it every week. I am sure you give me credit only once for those.
I have bothered to take the time out to write you this because you worked with a man of honor, Admiral Rickover.
I know you won’t correct anything that’s not what people do in our business but I still feel the need to explain to you why a sucker is NOT born every minute and my popularity rides not on showmanship but on rigor on my part and success on the part of the viewers and readers who use my work.
No need to respond.
It is hard to blame these gurus because some of them sell predictions for a living. They are able to sell predictions because investors want them. Humans hate uncertainty and that is why seers and prophets exist way back in history.
If not outlook, then what?
Investors are misled that they need to know where the market is going in order to make profits. They look too far into the future and trusting the fortune tellers too much. We must know what we can control and what we cannot. I had this revelation taking a lift.
If a stock is undervalued and fundamentally strong, buy it! If you worry about the market is going to collapse, you will never pull the trigger. If you put on a negative lens, I will guarantee you will find enough bad news about the stock market. If you put on a set of optimistic lens, I will guarantee you will see all the good news supporting an ever rising stock market. We see what we want to see. How do we maintain our objectivity doing a proper valuation when we are subjected to such biases?
Some investors would worry they may hold stocks during a market crash and sustain large paper losses. There is no free lunch in this world. That is the price of investing in stocks. The volatility is always there and that is why stock investors are compensated with a higher return than bond investors. Volatility (both upside and downside) is part and parcel of stock investing. It is a roller coaster ride and it isn’t wise trying to jump in and out of the car. Prep yourself psychologically, strap on and enjoy the ride.
We are not lacking information today but we are not making wiser decisions. The relentless pursuit for certainty in the future is resulting in poor decisions today. I think we have a greater chance of making money focusing on the now than repeatedly making futile attempts to predict the future. Our lives will be less stressful too.