Stock Market Forecasts: Total Crapola

"What can you learn from the top performing stocks of 2010?" Since that headline is in USA Today, the answer is automatically "nothing." The bigger question: can we learn anything from any stock market forecast, at all?

To the credit of USA Today finance columnist Matt Kranz, he points out that betting on last year's hottest stocks is a pretty shitty gamble. So in that sense, I guess what you can learn from the top performing stocks of 2010 is the concept of "reversion to the mean."

And since January is The Month of Forecasts, it's also worth reminding everyone: stock market forecasts are just made up crapola. Anyone who actually knew where the stock market was going would not be giving that information away for free. They would be too busy investing and becoming wildly rich, what with their magical, precise foreknowledge. We Googled "stock market forecast 2011." Here are the first three predictions:

  • "That leads me to believe the markets will remain range-bound, trading between 1100 and 1300 on the S&P over the course of the next year...For DOW watchers, that puts our expected range roughly between 10000 and 12000." [Ed.—Oh yea REAL BOLD prediction there.]
  • "Higher inflation and economic growth will be imported to the US as stocks rise by 20-25% in 2011."
  • And this place forecasts that the Dow will sink to 9,947 by August 2011. More precisely, they're 80% confident that it will be +/- 2,020(!) points from there.
What have we learned here? Forecasts are either so vague that they're not useful, or they're specific, but total guesswork. Found a forecaster who was correct last year? See if he can be correct five years in a row. The last few years of financial history strongly indicate no, he cannot. And if he can be even *moderately* accurate in long-term forecasting like that, he runs a hedge fund that charges entry fees far above what you can afford to invest. So forget it.

In conclusion, keep buying a balanced portfolio of low-cost index funds and holding them for 30 years, duh. And don't take financial advice from the internet.

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