Investor Minute
If They Can Predict the Weather, Why Not the Stock Market?
Humans have always had a strong desire to know the future. Soon after writing was developed in ancient Mesopotamia the Babylonians began using it to catalog thousands of auguries—observances of natural phenomena that they believed could predict major events.
We still want to know what’s going to happen in the near future. And to meet that demand in the area of meteorology the Farmer’s Almanac will soon publish its predictions for next year’s weather.
For more than 200 years, farmers and lots of other people have looked forward to and relied on the Almanac’s forecast. And with a self-proclaimed accuracy of more than 80%, it seems like that confidence is well founded.
So how does the Farmers’ Almanac come up with these predictions? They won’t say exactly. But they do admit their method uses some combination of sunspot activity and secret mathematical formulas. Still, if these old-fashioned methods manage to beat the accuracy of weather scientists using the latest technology, that can seem pretty impressive.
Of course, determining the Almanac’s specific accuracy is not easy. You need to compile and analyze quite a bit of historical weather data and then see how it matches up with their historical predictions.
Several years ago, meteorologist Joel Gratz did just that. He tested the Almanac’s predictions for winter weather against actual measurements and found that it was right about half the time. That’s roughly what you’d expect from a series of coin flips. Meanwhile it missed major climatic events, like the severe drought in California, which would have been very useful to know about in advance.
There are many forecasters who employ similar “black box” methods to try to predict the stock market. But aside from the occasional lucky guess, they cannot consistently foretell either individual stock prices or market movements as a whole. Because investor expectations and new information are priced in almost immediately, it’s nearly impossible to identify guaranteed “bargains” in advance.
Global stock and bond markets reflect the new and unknowable information in real time. Unfortunately, nobody has the “new and unknowable information” Almanac.
But this does not dissuade millions of people from trading on their own or someone else’s prediction, buying and selling in the hope of short-term gains.
Like with the Farmers’ Almanac, many want to believe that somebody really has cracked the code to the future.
The prudent investor, however, will ignore the ancient urge to follow the auguries and continue to save in a disciplined manner, regardless of what analysts are predicting. And he or she will enlist the help of a trusted advisor, not only to create a customized plan that’s designed to help weather the unknowable nature of the future, but also helps them stick with it for the best chance of success. Let us help customize your plan today. Click here to make a free phone consultation.