the Market Truth

Pieces of an article are pretty good over at TheStreet.com - a part of the "Apprentice Investor" column. It is called The Folly of Forecasting, favorite excerpt:

I wish an SEC-mandated disclosure accompanied all pundit forecasts: "The undersigned states that he has no idea what's going to happen in the future, and hereby declares that this prediction is merely a wildly unsupported speculation."

Don't hold your breath waiting for that to happen.

The bottom line is that I've yet to find anyone who can accurately and consistently forecast the market behavior with any degree of accuracy, beyond short-term trend following. That inconvenient factoid never seems to dissuade the prophets -- or the press -- from their fortune-telling ways.

There are a few things that investors should keep in mind when encountering these speculations. Whenever you find yourself reading (or watching) someone who tells you where a stock or the markets are going, consider these factors:

No one truly knows what tomorrow will bring. Nobody. Any and all forecasts are, at best, educated guesses.

All prognostications are instantly stale, subject to further revision. Conditions change, new data are released, events unfold. Yesterday's prediction can be undone by tomorrow's press release.

In order to "become right," some investors will stand by their predictions despite a stock or the market going the opposite way, hoping to be proven correct. Ned Davis called this the curse of "being right rather than making money."

I don't really like the way he promotes probability-based predictions, but the above is a step in the right direction. Also, he does mention what in my opinion is the only correct method for analyzing the market - from a risk-based standpoint:

The second type of good prediction is the risk-based discussion. These forecasts care less about price targets -- instead, they are an assessment of danger. In other words, to buyers of stocks under the present conditions, when this, that and the other are happening, you are taking on more (or less risk) than is typical. Saying the markets contain more or less risk at given times is a very different statement than: "I think the Dow is going to go to X."