Histories of Things That Never Happened

I don't watch cable business news very often, but when I do, I soon find myself writing an article about how obnoxious it is.

I got rid of cable a few years ago and never looked back. Part of the reason was, as a business writer, I was glued to financial news to an unhealthy degree. It's as dangerous as it is addictive. "The calamity of the information age is that the toxicity of data increases much faster than its benefits," writes Nassim Taleb.

But I was traveling last week, and couldn't resist flipping on the hotel's TV to my dear old friend, CNBC. There I was met with rapid-fire opinions from analysts -- half of whom are curiously employed by eponymous firms -- debating where the price of oil is headed, and what the S&P 500 will earn over the next two years.

In a world of breathless predictions, the most valuable tool might be Google Archive, which allows you to go back in time and see how old prophecies fared. We don't do this enough. The ultimate value of any forecast isn't whether it sounded nice. It's whether it eventually becomes correct. Spend some time in Google Archive, and you can't help but notice that the vast majority of forecasts about the economy or the stock market are utterly wrong in hindsight.

Our cable analysts opined about the future of oil and earnings. So it's worth looking at how popular opinions about these topics fared in the past.

Let's start with oil.

In the late 1990s, oil cost about $13 a barrel and a gallon of gas was less than a buck. Analysts' consensus was that it would stay that way. A 1998 Associated Press article explained that oil prices were likely to remain depressed "into the next decade, with no full recovery until after 2007." The Energy Information Agency predicted that after 2007 oil prices would trade no higher than $20 a barrel. That was on the bullish end; a 1999 New York Times article reminds us that "Oil company executives told Congress that prices would linger around $10 a barrel for the next decade." The reason for cheap oil was simple: Asia's economic crisis was "expected to help keep gasoline prices low for at least the next decade," The Kansas City Star wrote.

Whoops. Prices skyrocketed to $140 a barrel by 2008 -- 14 times the oil industries' own estimate a decade before. Much of the rise was due to heavy demand from... Asia.

Then the consensus did a 180. Dig through the 2008 archives and you find forecasts like this, from the Financial Times: "Gazprom, Russia's gas monopoly, on Tuesday predicted oil prices would reach $250 a barrel in 2009." The New York Times profiled a prominent analyst who foresaw "a 'super spike' -- a price surge that will soon drive crude oil to $200 a barrel."

Whoops again. Oil crashed to $31 a barrel within months.

Then opinions flipped anew. The Times wrote in early 2009: "Some are predicting that oil could fall to $20 a barrel and stay low for years."

Funny thing: It was back above $100 a barrel earlier this year.

The most accurate way of handling analysts' oil projections over the last decade was to multiply or divide them by five. Can we just admit that no one knows what oil will do in the future?

Now let's talk S&P 500 earnings.

It's 2007, and the stock market is booming to an all-time high. Analysts foresee the S&P 500 earning $94.20 in 2008, a new record. "It's a really good investing environment in general right now," an analyst tells Bloomberg. In fact, it was one of the worst in history.

The S&P ended up earning half the amount analysts expected in 2008, and stocks plunged nearly 50%. Another whoops.

By 2009 gloom was pervasive. Bloomberg lamented "the longest earnings slump since the Great Depression." Analysts expected the S&P 500 to earn $53 a share in 2010, and $63 in 2011.

In reality, the index earned $83 and $96, respectively. Here again, for the last five years you could have been a top performer by taking analysts' earnings estimates and multiplying or dividing them by two. Can we just admit that no one knows what earnings will do in the future?

Nobel-winning psychologist Daniel Kahneman recently remarked: "Many people now say they knew a financial crisis was coming, but they didn't really. After a crisis we tell ourselves we understand why it happened and maintain the illusion that the world is understandable. In fact, we should accept the world is incomprehensible much of the time."

The value in calling out bad predictions isn't to point fingers at those who have gotten it wrong. It's to point fingers at those who listen to and put faith in those predictions, assuming that suddenly, this time, experts can accurately see the future when history shows -- conclusively -- that they can't. It's not the experts, but the people who listen to the experts, that are the real fools.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (22) | Recommend This Article (82)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 10, 2012, at 4:42 PM, Stockinv wrote:

    CNBC has the most liberal agenda I have ever seen. If you have the skill to disseminate then you can get benefit from some of the reports and as far as sock graphics they have the best. I often watch the market averages and commodity prices with the sound muted. You are entirely correct if you listen and believe all you hear you will be in real trouble. It is not for the gullible.

  • Report this Comment On July 10, 2012, at 8:59 PM, cooncreekcrawler wrote:

    Thanks.

  • Report this Comment On July 11, 2012, at 8:09 AM, CluckChicken wrote:

    "CNBC has the most liberal agenda I have ever seen."

    I work near a break room that always has CNBC on and from what I hear they are defently not liberal. Unless your definition of liberal is anything that is not 100% conservative.

    Other then Warren and his friends they never have guests that support taxing the wealthy more and never have guests that say anything other then regulations and taxes on businesses are killing them.

    I agree that there are tidbits of good information from them if you can filter out the junk.

    Honestly though I am happy it is on CNBC because at least they have news to report unlike CNN, MSNBC and Foxnews.

  • Report this Comment On July 11, 2012, at 4:19 PM, hbofbyu wrote:

    We can all get swept up in prevailing notions of the day (especially if we watch too much news and TV).

    A quote I keep in my aphorisms of investing:

    "...the good ole days weren't always good

    and tomorrow ain't as bad as it seems" - Billy Joel

    (pay no attention to the fact that Billy went bankrupt 3 times.)

  • Report this Comment On July 11, 2012, at 4:22 PM, TheDumbMoney wrote:

    love

  • Report this Comment On July 11, 2012, at 5:55 PM, xetn wrote:

    The fact is nobody can predict the future and all projections, regardless of whether it is CNBC or TMF are just guesses, based mostly on history.

    The biggest problem is the frequent occurrence of "black swans". As long as a trend continues, some projections can be fairly accurate.

  • Report this Comment On July 11, 2012, at 6:27 PM, Manifest wrote:

    I predict that Morgan Housel will mysteriously be selected (in an astonishing and particularly Foolish secret ballot at the convention) as the Democratic party's candidate for president. Who saw that coming?

  • Report this Comment On July 11, 2012, at 7:38 PM, fool3090 wrote:

    I have to keep repeating this daily mantra:

    It's will never be quite as bad as you fear, but never quite as good as you hope.

    Investing, as in life, this is pretty much true.

  • Report this Comment On July 11, 2012, at 8:00 PM, ipapajoker wrote:

    after telling me the prognostications of you prognosticators is always wrong you have the gall to ask me to pay for yours!

    Great well you made your point. No thanks

    papajoker

  • Report this Comment On July 11, 2012, at 8:47 PM, LifeStar1 wrote:

    I agree with the writer of this article!

    The truth is if you listen to the “wrong and inaccurate information or wrong people” and “do what the wrong information or wrong people misinformed you," the outcome will be and is disastrous for you and for the people that involved you in the heart of the subject matters!

    For instance, if the “police officers or state authorities listen to the wrong people or the perpetrators instead of listening to the victims per se,” then, not only the police officers or state authorities are not fulfilling its public agency’s mission, goals, and visions in terms of to protect and to serve the people, but the “police officers or state authorities will end up depriving and violating the rights, liberty, and dignity of the victims—wounded human beings”—because of the perpetrators’ actions that forced and made these pupils to be victims in the first place—and will end up hurting and violating humanity as a whole!

    Sincerely,

    Lifestar

  • Report this Comment On July 11, 2012, at 9:25 PM, Wade32ru wrote:

    The Black Swan is an excellent book - not just for investing, but for life in general. Highly recommend.

  • Report this Comment On July 11, 2012, at 11:08 PM, cbaines2 wrote:

    Good one Morgan!

    Chris Baines

  • Report this Comment On July 12, 2012, at 10:24 AM, sigiam wrote:

    Does anyone else find it just a touch ironic that the article is followed by a tmf add trying to predict the market in the month of november 2012... I always find it funny that 80% of fools think stocks are fairly priced, and you are better off just buying an index fund, yet we all (myself included) devote enourmous time to achieve what we don't believe is possible, save for by luck...

  • Report this Comment On July 12, 2012, at 12:28 PM, lowmaple wrote:

    Another great article. I try to keep track of some predicters so I know which way to take their "analysis" in future articles.

  • Report this Comment On July 12, 2012, at 7:18 PM, samfoolcisco wrote:

    The number of Black Swans observed by pundits recently makes me think that "those aren't Black Swans, they're just the swans.."

    Welcome to the new normal?

  • Report this Comment On July 12, 2012, at 7:21 PM, Darwood11 wrote:

    Great article.

    With the overload of what is purported to be "information" far too much is "disinformation" and designed to keep us listening.

    The best thing I have done is only have very basic cable, avoid MSNBC and CNBC, read as much as I can with the intent of educating myself, and limit my time on the internet.

    Which is why I don't comment all that much at the Fool!

  • Report this Comment On July 13, 2012, at 12:52 AM, whereaminow wrote:

    Morgan,

    Better than your usual statist schtick but it still falls short. It leaves unanswered the implied question. Why do so many predictions fail so badly?

    Mises gave us a clue to the answer 70 years ago. Without theory, he said, one can assume anything. In other words, without a deep understanding of human action, these sad attempts to make predictions from the gathering of disparate data points makes a mockery of economic science.

    And yet econometrics continues to dominate mainstream economic journalism. Meanwhile, over at EPJ, Robert Wenzel, using Mises' causal-realist approach, has been on top of both the housing crash and the recent bubblicious short term stock market recovery. So has Frank Shostak. (And Mises himself predicted the 1929 crash while Keynes lost his life savings.) And so has Gary North.

    At some point I hope you'll attempt to cover the future or economics - those who eschew econometric quackery for a sound methodological approach. I'm sure you will start with a hatchet job but I look forward to crushing you in the comment section.

    David in Liberty

  • Report this Comment On July 13, 2012, at 9:19 AM, Klonghorn12 wrote:

    is it even possible that someone who signs his name "David in Liberty" on every article comment doesn't have a personality disorder?

  • Report this Comment On July 13, 2012, at 9:54 AM, whereaminow wrote:

    ^ Who wouldn't have one after a few of these?

    http://beeradvocate.com/beer/profile/2743/41626/

    David in Happiness

  • Report this Comment On July 13, 2012, at 1:20 PM, Knightmare535 wrote:

    "Hey, It's hard to make predictions, especially about the future."

    Yogi Berra, I think (Or at least someone that talks like he does)

  • Report this Comment On July 13, 2012, at 5:56 PM, gamblegold wrote:

    frankly, morgan, your articles may be the only thing that keeps me subscribing to fool. another bookmark and i'll probably be quoting you in some of my own opines.

    a job well-done. and my thanks, too.

  • Report this Comment On July 29, 2012, at 12:56 AM, thidmark wrote:

    I value CNBC for the news info. I don't pay much attention to anyone's predictions -- whether it's CNBC, TMF or Sports Illustrated.

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