Of the so-called "Masters of the Universe" on Wall Street, Goldman Sachs (NYSE:GS) is perhaps the most revered. It's widely considered the most prestigious investment bank on Wall Street, and its reputation is strong enough to draw the brightest minds in finance without having to pay the most.
Despite Goldman's role in the financial crisis, and obnoxious statements such as CEO Lloyd Blankfein's claim that the bank is doing "God's work," its sterling reputation has remained in tact. Goldman's predictions are the closest thing to a crystal ball in the financial media, and they regularly draw headline coverage. However, they are often dead wrong. Here are some of the bank's worst predictions from 2014.
1. Gold will decline significantly
Prediction: After a loss of around 26% in 2013, Goldman said the precious metal would continue to lose its luster in 2014, falling by at least 15%, or below $1,057, citing, among other things, the effects of the Fed's stimulus taper. Goldman reiterated the target several times over the course of the year.
Reality: Gold hit a bottom at $1,150 last fall, never approaching Goldman's target, and finished the year essentially flat, down just about 3%.
Predicting the future value of gold is particularly difficult, as there are no cash flows underlying the value of the metal, nor is it tied to economic growth the way other commodities since it's not valued for its utility.
2. Oil will be $90 in the first quarter of 2015
Prediction: Goldman had originally forecast West Texas Intermediate crude prices to reach $90 a barrel for the first quarter of 2015, but it made headlines when it cut its price target in late October for the beginning of this year.
Reality: It's now three weeks into 2015, and oil remains below $50, befuddling nearly every analyst on Wall Street.
To its credit, Goldman was actually more bearish than its peers, lowering its forecast before other banks did. Its predictions also often have the effect of moving the market, so oil prices generally fell as Goldman lowered its forecast. With oil now below $50, the banks have adjusted their forecasts accordingly, but there have been so many revisions at this point that current predictions are just as likely to change next week, making them essentially useless.
3. Brazil will win the world cup
Prediction: Goldman Sachs' prediction for the World Cup received a lot of attention,and it came with a detailed explanation on how the model was based on regression analysis using the entire history of international competitive matches since 1960. It also weighed factors such as home-continent advantage for Latin American teams. The model gave Brazil a near 50% chance of winning -- unusually strong, and far better than Argentina, which was next in line with a 14% chance of winning.
Reality: Brazil was ousted in the semifinal in embarrassing fashion, losing 7-1 to Germany, which went on to win the tournament, beating Argentina in the final.
Of course, Goldman didn't guarantee Brazil would win the tournament, but they were still four times as likely to win as Germany, which was given an 11% chance of emerging as champion, underscoring the difficulties of predicting sports outcomes and the fact that the model was probably flawed.
Lessons for investors
The financial media is rife with predictions and punditry, as that helps sell investors, but rarely do analysts take the time to look back on the accuracy of their predictions. Moving price targets on items such as oil prices makes doing so even more difficult as each prediction seems to be subject to further review. This should remind investors that in the financial markets, there are no true "experts" who know with certainty what will happen in the future.
Another recent headline underscores the rarity of successfully making big calls. Zach Schreiber, CEO of hedge fund PointState Capital, laid out a case for oil's collapse back in May and has reaped a $1 billion profit betting on its fall. Many other hedge funds lost big on the oil plunge, and the big banks, meanwhile, have just been following the news as they lower their oil price projections.
In hindsight, of course, it seems easy to have seen the oil crash coming, but most could not and did not predict it. Similarly, the subprime mortgage collapse was also foreseeable, but almost none of the financial experts projected that collapse.
Goldman's predictions will continue to be splashed on financial news headlines, but investors should remember: Talk is cheap.