"It's tough to make predictions, especially about the future."
-- Yogi Berra
Every year, the stock market either advances, declines, or stays flat. It's never clear beforehand which direction these indexes, or the stocks that comprise them, will move; the reasons for their price swings only make sense in retrospect.
But that truth doesn't stop people from making aggressive predictions attempting to identify the Next Big Thing or to call a coming crash or boom. Here are a few classic examples of some smart market watchers getting burned by their stock calls.
1. McDonald's will trounce Google as an investment
Whitney Tilson has used his value investing approach to produce awesome returns for himself and his investors over the years. Yet his tendency to bash "expensive" companies with high price-to-earnings ratios has also burned the hedge fund giant -- big time.
For example, back in 2004, Tilson made a bold prediction. Writing for The Motley Fool at the time, he said the soon-to-be-public Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) (a.k.a. Google) would almost certainly flame out as a business. "I'd wager that odds are at least 90% that its profit margins and growth rate will be materially lower five years from now," he argued.
Tilson got even more specific, saying that McDonald's (NYSE:MCD) would make a much better bet given its far lower valuation. "I believe that it is virtually certain that Google's stock will be highly disappointing to investors foolish enough to participate in its overhyped offering -- you can hold me to that," he concluded.
So how did that prediction pan out? Since 2005, Alphabet shares are up roughly 16 times, compared to less than a 400% return for the fast food titan. The search engine giant produced nearly $20 billion of net income last year, versus McDonald's $4.5 billion. Today, Alphabet is worth almost six times McDonald's in the eyes of the market.
2. Smartphones will be a bust
A deep understanding of technology isn't enough to protect you from being surprised by major shifts in the industry. Andrew Grove was one of the founders of Intel, which profoundly shaped the semiconductor industry. He was Time Magazine's Man of The Year in 1997. Yet in 1992 he made a prediction that looks amazingly shortsighted in retrospect.
A New York Times article described Grove as standing diametrically opposed to the position taken by Apple (NASDAQ:AAPL) that smartphones, then imagined as "personal communicators," might develop into a huge business. They'd be "the mother of all markets," according to Apple's then-CEO, John Sculley.
Grove disagreed. The idea of a communicating device that people carried around with them is "a pipe dream driven by greed," he said. Ironically, the article lists a few predictions about the technology that proved prescient. These personal communicators might handle emails, use GPS to map directions, and even allow someone to "order pizza using a combination of custom electronic forms and wireless fax."
Today, the smartphone industry is massive, with Apple accounting for nearly 150 million iPhone sales in the past year. These devices helped spur over $24 billion of complementary service-based revenue, which demonstrates that, if anything, investors weren't being greedy enough about the potential for smartphones to find a huge market.
3. The Dow is headed to 36,000
James Glassman's 1999 book titled Dow 36,000 hasn't aged well. In fact, Washington Post economics columnist Neil Irwin called it "perhaps the most spectacularly wrong investing book ever" given that it forecast a massive rally for stocks between 1999 and 2004.
Glassman's timing couldn't have been worse. The Dow hit 14,000 the year his book published before plummeting to a 15-year low of 7,000 in 2009. A roaring rally has pushed the blue-chip index back to new highs recently, but today it's still 42% below the mark he believed the Dow would achieve over a decade ago.
To his credit, Glassman has taken a hard look at how his prediction could have been so far off the mark. He identified two major factors that he and his co-author missed: earnings growth and the attitude of investors as reflected in the price-to-earnings multiples they are willing to pay for stocks. Neither trend went in the direction they had targeted.
A better way
These failed forecasts illustrate how overconfidence can prove fatal to your portfolio while predictions about economic trends are rarely more than a distraction from the business of accumulating stock market returns.
Bold predictions are compelling because they attract debate and can pay big dividends if proven correct. But no one knows which direction stocks or markets will move over the short term. That's why investors are better off simply buying a diverse group of solid stocks and holding on to the shares for years (or decades) while allowing the power of compound returns to do all of the hard work.