In today’s digital age, financial information is readily available at our fingertips, and it’s tempting to click on enticing headlines that promise to reveal “The Best 5 Stocks to Buy,” “Top 3 financial Moves to Make,” or “Why Markets Are About to Crash.” These clickbait articles often feature self-proclaimed stock experts who claim to possess the secret to beating the market consistently. As an investor, I often take the bait and read these articles to see if there is content that I’ve missed. As a securities litigation lawyer and a Certified Private Wealth Advisor® professional, I wanted to shed some light on these flashy headlines and explore their real value.
Nick Murray and the Brinson Study
In the field of investment counseling, the book “Behavioral Investment Counseling” by Nick Murray is widely regarded as a seminal work. In it, Murray emphasizes that real-life actual returns are only marginally affected by market timing and security selection (i.e., whether one buys stock in Raytheon, Northrop Grumman, or General Dynamics). Rather, the typical investors’ investment returns are driven by their behavior, often reacting to the latest headlines and short-term market swings.
Murry points out that financial headlines are written to get people to read the article. Thus, Money magazine never has a headline story about the “Brinson study”[1] which analyzed data from 91 large U.S. pension plans over the 1974-83 period and found that investment policy/asset allocation dominate market timing and stock selection. Specifically, it found that asset allocation accounted for over 90% of returns and less than 10% came from market timing, stock selection, and other variables. Despite this evidence, the media often focuses on short-term stock picks and market forecasts rather than long-term asset allocation strategies.
Forecasts Are Akin to a Flip of a Coin
The “Guru Grades” study conducted by the CXO Advisory Group delved into the accuracy of stock market forecasts provided by 68 experts over a significant period from 2005 through 2012.[2] These self-proclaimed experts employed various indicators like technical analysis, fundamental analysis, and sentiment analysis to make their predictions. The study collected a staggering 6,582 forecasts for the U.S. stock market.
The study’s findings were eye-opening and shattered the illusion of stock gurus possessing extraordinary market timing abilities. On average, the accuracy of all forecasts was barely above 47%, which is no better than flipping a coin. The distribution of accuracy among gurus followed a bell curve, suggesting that their predictions were akin to random outcomes.
Some prominent names in the financial world, who frequently appear on media outlets and are revered as market experts, were among the contestants in this analysis. However, their accuracy scores were surprisingly mediocre. Figures like Jeremy Grantham, Mark Faber, Jim Cramer, and Abby Joseph Cohen had accuracy scores ranging from 35% to 48%. Only five gurus out of the 68 had accuracy scores above 60%, and none achieved a score as high as 70%.
Another study on market forecasts, intended to build upon the study by the CXO Advisory Group, came to a similar conclusion.[3] The study examined the accuracy of forecasts made for the S&P 500 Index. Their research reinforced the notion that market experts’ forecasts were no more reliable than those made randomly. Their results showed that while some gurus had performance results that were stellar, the majority performed at levels not significantly different than chance. Across all forecasts, the accuracy was again below 50%, demonstrating that even professional forecasters were not consistently accurate.
The Perils of Relying on Forecasts
These studies uniformly reveal that acting on stock picks by stock gurus or expert market forecasts is unlikely to result in profitable investment decisions. In fact, relying on such forecasts can be detrimental to an investor’s long-term financial goals. The temptation to act on predictions that align with one’s own biases can lead to impulsive decisions, causing investors to stray from their well-constructed financial plans.
Advice from Warren Buffett[4]
In a 2013 letter to Berkshire shareholders, the legendary investor Warren Buffett warns against “forming macro-opinions or listening to market predictions.” He said that such endeavors were a waste of time and, more importantly, can distort investors’ understanding of crucial facts. Instead, investors are better served by having a robust financial plan that includes clear rebalancing targets, and they should remain committed to that plan despite short-term market fluctuations.
Conclusion
As a lawyer and financial advisor, my mission is to provide sound guidance to clients. The Guru Grades study and the research on market forecasts, along with insights from the book “Behavioral Investment Counseling” and the Brinson study, demonstrate that the allure of stock gurus’ predictions is nothing more than click-bait. Investors must recognize that stock market timing is a challenging feat even for seasoned experts. Instead of chasing sensational headlines, investors are better served by working with a trusted financial advisor to develop a long-term financial plan that aligns with their unique goals and risk tolerance. A well-diversified portfolio, regular rebalancing, and the discipline to stick to the plan should ultimately lead to more successful and prosperous investment outcomes.
[1] Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, “Determinants of Portfolio Performance,” Financial Analysts Journal, July/August 1986, available at https://www.jstor.org/stable/4478947.
[2] CXO Advisory Group, “Guru Grades,” available at https://www.cxoadvisory.com/gurus/.
[3] David Bailey, Jonathan Borwein, Amir Salehipour, and Marcos López de Prado, “Do Financial Gurus Produce Reliable Forecasts?,” SSRN, March 2019, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3339657.
