2012: The Year Few Got Right

There's nothing special about a year. It's just the time it takes for the earth to circle the sun. But we use the calendar to make all kinds of judgments and predictions, forecasting what we think will happen over the coming 365 days.

The first week of 2013 has seen a flood of articles prophesying the events of the next 12 months.

Rather than insult you with another list of predictions for the year ahead, I find it more valuable to look back at how some of last year's prediction lists fared. A year ago, analysts were making a variety of predictions, but there was one common theme: Most of them were wrong. Dead wrong.

So let's review some of last year's biggest predictions that never came true -- not because we want to point fingers, but because you can often learn more from people's mistakes than from their successes.

1. Barron's: Interest rates will rise
A year ago, Barron's began its "2012 Forecast" article with a prediction that left no wiggle room: "Yields on 10-year Treasuries don't have anywhere to go but up in the next year."

But there was another place they could go: down. And that's where they went. Interest rates on 10-year Treasuries began the year at 1.97% and closed at 1.73%.

Treasury bonds have been in a bull market for 30 years. Someday that will end, and interest rates will rise. But no one knows when, and trying to predict a turn is maddeningly difficult. U.S. Treasuries have gained more than 20% since America's credit rating was downgraded in 2011 -- the opposite outcome of what almost everyone expected. Traders have been predicting the end of low interest rates in Japan for nearly two decades, and for nearly two decades, they've been wrong. These things can last much longer than anyone expects.

2. Todd Schoenberger: Stocks to crash 35%
A day before Christmas 2011, analyst Todd Schoenberger said, "We're predicting the S&P 500 will be down 20% by mid-year, and by the end of the year, we'll be down 35%. ... Buyer beware."

The S&P 500 (SNPINDEX: ^GSPC  ) finished the year up 14%. The Dow Jones Industrial Average (DJINDICES: ^DJI  ) gained 10%. Far from "buyer beware," the reality was "buyer, prepare for one of the best years of the last decade."

Stocks will crash again someday. Count on it. But again, the when is virtually impossible to predict. The key to successful investing isn't predicting when a crash will occur, but rather being ready for one when it inevitably comes -- preparedness, not prescience.

3. Lakshman Achuthan: A recession is here
Lakshman Achuthan, who heads economic forecasting firm ECRI, made a bold and succinct call in September 2011: "If the United States isn't already in a recession now, it's about to enter one." Some other highlights:

  • "It's a full-blown wildfire."
  • "The best case scenario is a mild recession."
  • "Now the question is, how long and how deep is this recession?"

Achuthan told Bloomberg recession was "inescapable." But why trust his call? "We don't make false alarms," Achuthan said, noting ECRI's impressive track record.

And he even put a time frame on his call. In December 2011, he said: "If there's no recession in Q4 or the first half, then we're wrong. You're not going to know whether or not we're wrong until a year from now."

Well, it's a year from then, and there's no recession. By most measures, the economy is strengthening.

There will be recessions in the future -- that's guaranteed. But you can never predict something as complex as a $15 trillion economy with 315 million citizens and 20 million businesses with precision or certainty. Maybe recession will come this year. Maybe next. Maybe we'll enjoy a decade-long boom. Achuthan's error wasn't his analysis -- he's a smart economist -- but rather the unwavering confidence in his analysis. There is a counterintuitive rule of thumb regarding forecasters: The more certain they are of their big predictions, the less weight you should give them.

4. Greece will leave the Euro
Many made this prediction a year ago. Citigroup (NYSE: C  )  predicted that Greece would leave the euro on Jan. 1, 2013 (it didn't). In December 2011, London mayor Boris Johnson predicted a Greek exit as well. The BBC wrote:

"I would be amazed if we were all sitting here next year and the euro had not undergone some sort of change," Mr Johnson [said]. ... "I think it highly likely that there will be a realignment in the sense that some countries will fall out ... and we all know who the likely candidates are," he said, adding that ouzo (a Greek drink) would be "substantially cheaper" in a year's time.

Here's a good rule of thumb for what's going to happen in Greece: No one has any idea what is going to happen, ever. The forces that dictate events like Greece leaving the euro are political, not economic, and no sane person would ever claim to understand the irrationality of a politician's mind. Nassim Taleb once wrote: "The best test of whether someone is extremely stupid (or extremely wise) is whether financial and political news makes sense to him."

Bonus fact: Greek stocks returned 33% in 2012, making it one of the best regions in the world to invest in.

Hot air galore
Go down the list of pundit predictions, and you'll find this same story again and again. The track record of financial experts foretelling the next 365 days is dreadful -- so bad, in fact, that assuming the opposite of what they predict may be the best strategy. If I could offer two tips on how to react to analyst predictions, they would be:

  • Avoid those who talk in certainties. The most reliable forecasters think in probabilities. Saying a recession is guaranteed this year is ludicrous and ignorant of history. On the other hand, saying there's a 70% probability of a recession may be a prediction worth paying attention to. They are vastly different calls.
  • Listen to people who talk about their mistakes. One of the keys to making good forecasts is constantly updating your thoughts when new information arises. That can mean changing views entirely. In 2009, CNBC host Larry Kudlow proudly announced, "I have not changed my point of view for my entire adult life." I struggle to think of a worse trait for someone hoping to understand the world. The guy you want to listen to is the one who is constantly saying: "I was wrong. Here's why, and here's how it's changing my outlook."

Here's to a happy, safe, healthy, yet most unpredictable 2013.

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

Editor's Note: An earlier version of this article incorrectly reported the 2012 return for the Dow Jones Industrial Average. For 2012, the index returned 7.26%. With dividends reinvested, the return was 10.24%.


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Read/Post Comments (28) | Recommend This Article (64)

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 January 04, 2013, at 10:23 AM, TMFDiogenes wrote:

    nailed it

  • Report this Comment On January 04, 2013, at 10:31 AM, brigidl wrote:

    Very good article Morgan,

  • Report this Comment On January 04, 2013, at 12:08 PM, yonkmember wrote:

    The guy you want to listen to is the one who is constantly saying: "I was wrong. Here's why, and here's how it's changing my outlook."

    Nice point and excellent article.

  • Report this Comment On January 04, 2013, at 12:11 PM, portefeuille wrote:

    My fund's 2012 performance is around 88%, so I must have been right a few times. I am fairly confident I will do better in 2013 ;)

    http://caps.fool.com/Blogs/88/785537.

  • Report this Comment On January 04, 2013, at 3:01 PM, ZippyX2000 wrote:

    I pulled 25% total return making my own decisions so no complaints from me.

  • Report this Comment On January 04, 2013, at 3:01 PM, TheDumbMoney2 wrote:

    Nice article. Larry Kudlow is a walking, talking example of all that is wrong in economics, financial journalism, and related financial opinionism.

  • Report this Comment On January 04, 2013, at 3:37 PM, astuber9 wrote:

    Another day, another article by Morgan about how the pundits got it wrong. It is good to remember how bad they are and I especially like the "avoid those who talk in certainties." When is the last time you heard a pundit say "I don't know for sure, but this is my best guess." For some reason that phrase does not exist in their vocabulary.

  • Report this Comment On January 04, 2013, at 3:41 PM, TMFMorgan wrote:

    <<Another day, another article by Morgan about how the pundits got it wrong. >>

    I'll stop writing about it when they stop getting it wrong.

  • Report this Comment On January 04, 2013, at 3:47 PM, smartmuffin wrote:

    It's pretty easy to criticize the predictions of others with the gift of hindsight. Of course, had all of those predictions came true, you could have still written this article, just about the incorrect predictions others made that the stock market would rise, interest rates would fall, and greece would stay in the Euro, because surely somebody out there predicted those things too.

    Not so easy to make your own. So how about it?

  • Report this Comment On January 04, 2013, at 4:16 PM, TheDumbMoney2 wrote:

    smartmuffin, the whole point is that it is pointless to make non-probabalistic predictions. (Those who correctly predicted that Greece would remain in the Euro (ie, Bill Ackman) did so probabalistically.)

    A refusal to make non-probabalistic predictions therefore does not contradict the analysis, or weaken it, or signify some sort of hypocracy, as you seem to think. Rather, such a refusal confirms the analysis is consistent with its premise.

    It is perfectly reasonable to make predictions, and we all do. Whether or not we are aware of it we often are making probablistic predictions, whenever we decide matters like position-sizing and diversification and even buy/sell dates. The people by contrast who speak in certainties often have no money riding on their calls, and get paid for being provocative, not right.

    What's really sad is when you see fund managers who have started down the road of certainty. Some of those are Hussman, David Merkel (who I have stopped following on Twitter), the Alhambra Investments guy, etc. These guys are so anti-Fed, so dogmatically, that I think they have done their investors a disservice. (And Hussman manifestly has, based on his returns. That poor guy started getting into arguments about how what the Fed had done was illegal, which had nothing to do with his models, and which likely caused deviations from them.). By contrast, after Bill Gross made his famously wrong Early 2010 bearish call on Treasuries, he turned practically on a dime and bought Treasuries, while acknowledging his bearish thesis may (it will) play out at some future date.

    To me, right now the people with most credibility in the markets and on economic issues are: Warren Buffett, Jeffrey Gundlach, and Ray Dalio. Everyone else is basically noise to one degree or another, though even these three are to some extent. Second tier would be the guys at GMO and Pimco. Best predictive blogger seems to be Bill McBride (though his housing calls have been uncomfortably certain and he'll go off the rails eventually) followed by Miller at A Dash of Insight.

  • Report this Comment On January 04, 2013, at 5:28 PM, darrellquock wrote:

    Since we are talking about predictions, what time are you picking to win the superbowl?

    I am going with the 49ers....hehe

  • Report this Comment On January 04, 2013, at 5:31 PM, TheCFP wrote:

    Very well written and excellent advice for the lion's share of the investing public. In fact - I intend to send a link to my clients.

  • Report this Comment On January 04, 2013, at 6:09 PM, Tigerdog wrote:

    It seems to me you over stated the returns for the S&P 500 and DJI. I think the returns are really 13.41 and 7.26 respectively which makes me wonder about Supernova!

  • Report this Comment On January 04, 2013, at 6:23 PM, AnsgarJohn wrote:

    Why are macro or market predictions relevant?

    Although it is impossible to demonstrate whether a market is efficient, i.e. if all the information is priced into the share price, we are able to see that there is a group of investors (Value Investors) which has systematically achieved better results than the market. They all have the same characteristics:

    Always invest in the long term.

    They systematically apply value investing.

    They pay scant attention to macroeconomic analysis.

    They do not find technical analysis relevant.

    They don’t often use derivatives.

    Source: http://www.bestinver.com/value.aspx#

  • Report this Comment On January 04, 2013, at 7:45 PM, diverdon56 wrote:

    Your duplicitous reference to Larry Kudlo cheapens your otherwise good article. You should be able to understand that Larry was talking about his point of view on values, not making some absurd claim to be able to predict the future.

  • Report this Comment On January 04, 2013, at 9:29 PM, TMFMorgan wrote:

    How is it duplicitous? He was berating someone for changing their views and that was his response.

  • Report this Comment On January 05, 2013, at 2:48 AM, TerryHogan wrote:

    I don't know if I want to listen to the guy who is constantly saying "I was wrong".

    I'd prefer someone who is right most of the time but can admit their mistakes, so that every once in a while they are saying "I was wrong and here's why."

    I'd agree that you shouldn't make investment decisions based solely on analyst predictions, but I think there's value in reviewing their reasoning, and seeing why they are predicting what they are predicting. I like listening to people talk about Elliot wave theory solely for the entertainment value.

  • Report this Comment On January 05, 2013, at 7:08 PM, Millsteen wrote:

    The predictions and business commentary is so so bad, I pity the investor who listens to any of it. It's all bad noise. Invest in solid dividend paying great companies and turn off all the news except motley fool.

  • Report this Comment On January 06, 2013, at 4:33 AM, Chilaw wrote:

    Morgan, as a regular reader and fan, I appreciate your articles, but they are getting a little repetitive--at least on the predictive thing.

  • Report this Comment On January 06, 2013, at 7:57 AM, TMFMorgan wrote:

    ^ Thank you, but I disagree for two reasons:

    1) The lack of accountability among pundits is one of the most important financial stories that exists, because it influences people's behavior in destructive ways.

    2) I've written more than 500 articles in the last year and fewer than 10 have focused on bad predictions.

  • Report this Comment On January 06, 2013, at 12:09 PM, Chilaw wrote:

    Ok, point taken. I may be experiencing confirmatory bias now each time I read about bad predictions.

    Keep up the good work.

  • Report this Comment On January 06, 2013, at 2:17 PM, buddylee59 wrote:

    Thanks for the perspective, Morgan. Best wishes for a successful 2013.

    BL

  • Report this Comment On January 06, 2013, at 2:29 PM, RobotsDream wrote:

    Morgan your my goto guy for articles on TMF and on point again in this one. Keep up the great signal to noise ratio.

    We are often too soon old and too late smart.

    Keep up the great work, your concise writing and insight really add to this community.

  • Report this Comment On January 06, 2013, at 2:36 PM, TMFMorgan wrote:

    ^ Thanks!

  • Report this Comment On January 06, 2013, at 7:01 PM, athanSNelson wrote:

    Check out this forecast from last month:

    http://alturl.com/944kr

    Good luck

  • Report this Comment On January 06, 2013, at 10:47 PM, EvanBuck wrote:

    Very well put. Great article! I remember there being a good piece on TMF related to this about the market for grandiose predictions being larger than ever.

    BTW - I was rec #50 :-)

  • Report this Comment On January 08, 2013, at 1:29 PM, fool3090 wrote:

    Always awesome, Morgan.

    I looked into my cup of coffee this morning and the grounds at the bottom foretold the following with strong certainty:

    * Apple will purchase Microsoft in an all-cash deal. "We had to do something with our bundles of moola," admits Tim Cook, Apple CEO. "They were getting out of control."

    * RadioShack shares will soar in 3Q 2013 due to pent-up demand for AM/FM radios, batteries and phone cords.

    * The two-big-to-fail banks will hold a big press conference to beg forgiveness from to the American people, vowing to tithe 10% of gross income to charity as "a gesture of trust and goodwill."

    I might be wrong on these, but stranger things have happened.

  • Report this Comment On January 16, 2013, at 4:03 PM, thidmark wrote:

    Without any context, using Kudlow's quote is a pi$$-poor example.

    it tarnishes an otherwise quality piece.

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