Jun
14
Some Thoughts on Forecasting, by Victor Niederhoffer
June 14, 2007 |
I often wonder why the public can be repeatedly misled by forecasts that are consistently wrong, and by forecasters that have no raison d'etre. I believe the underlying reason is that we are brought up to be insecure, and we look to others for the sources and solutions to our problems, rather than looking to ourselves.
Such forecasters as the weekly financial columnist, can be consistently wrong, (he has been bearish every week since the Dow was at 800), and yet be among the most revered and respected forecasters of all. For an answer to this, I turned to Harry Browne's book, Why the Best Laid Investment Plans Go Wrong.
I always start with the Humble Pie with Whipped Cream, on p.43, where Browne points out that the archetypal forecaster looks for anything in his forecast that happens to have the vaguest resemblance to the ultimate outcome, and then tells you in subtle ways that "he told you so" or "it was so clear from this or that indicia."
Browne reviews the yearly self-evaluation of an investment adviser, who might be prone to using levels and ranges as his weapon for misdirection:
He almost always seems to have been around 87% right … He usually cites some examples that turned out to be wrong – "I was a bit too optimistic about the high in gold, I said 450 when it was actually 406." You can see that he's being more than open and honest, and he demonstrates that his talent and even his standards tower far above yours and mine … Any man who's wrong 13% of the time, and who's that close when he's wrong must be a genius … When I check, however, I find that his original forecast was "Gold's high will be between 450 and 500," and this was made when gold was already at 406. So he missed the high by 15% and failed to note that gold actually ended the year at 350, down 15% from his forecast.
For many years, I have believed that there is little correlation between the past record of an adviser or manager and his future success. Too often, adviser get good results with small amounts of money, but the market loves to let you make a small amount of money, just to encourage you to then raise a larger investment to lose.
I believe that the period of 2000-2002, where advisers and managers made money by being hedged or net short, was a period that was particularly detrimental to investors, in that it has led so many of them to stay with those who were relatively successful in this period. These managers and advisors have lost their investors so much more money in the subsequent period, when the markets have doubled, than the amounts they made their investors when they initially began investing.
I try to eschew from forecasts on this self improvement, mutual education, deflation of ballyhoo, forum. For one, I know how fallible I am, and second, I am cognizant of the principles of ever changing cycles, (Robert Bacon.) If we did forecast, many very potent readers might mistakenly believe that what we have to forecast is better or worse than average, and in either case it would be detrimental to all concerned. Also, I would find it hard to make a forecast where I didn't have a position, because I trade often … and if I did have a position, my position could be helped along by my communiqué. Furthermore, when I got out of the position, I would be hard pressed to be so fair and honorable that I would let all of my readers extricate themselves before I did, to my disadvantage.
Of course, if I were an innocuous type, and was prone to forecast without having a position, then I would be subject to making absurd calls, without possible economic feedback, and could possibly be wrong as consistently as the weekly financial columnist, or others of his ilk. I would never know how much damage and harm and loss my forecasts might cause to those poor souls who actually placed any reliance on them.
Harry Browne's book is a treasure trove of insights as to how one can watch out for being misled, and I recommend it highly. I also encourage all of you not to rely unduly on forecasts in the future.
As an afterthought, while considering this question, I couldn't help but notice that the Fake Doctor might do well to refrain from making so many forecasts in future. His former economics forecasting company was not well known for its accuracy, and recently he has been involved in an orgy of forecasts on such things as interest rates, the extent of reserves in the earth, and the likelihood of gains in the Chinese markets.
Browne lists several criteria for evaluating the likelihood of a forecaster to stand out from the crowd, such as talent in the field, and expertise. Other caveats, like the self interest they might have in their forecasts, the ability of those who follow them to extricate safely, and the likelihood that their own expertise in areas like geology, or Asian activities, might not be greater than average, should be considered also.
Riz Din writes:
Judging by the content in much of the media, there certainly seems to be an education of insecurity taking place, well beyond the realms of the financial forecaster. Combined with the tendency to focus on the shorter-term and not to cultivate the big, broad outlook, these are good conditions in which the pessimistic forecaster can flourish. I also wonder whether their is an evolutionary component that plays a role in this game, since the average human is a risk-averse individual.
Regarding the Fake Doctor, in March of 2004, he commented on exchange rate forecasting that,
…despite extensive efforts on the part of analysts, to my knowledge, no model projecting directional movements in exchange rates is significantly superior to tossing a coin. I am aware that of the thousands who try, some are quite successful. So are winners of coin-tossing contests.
He is obviously now paid to have a view, but I wonder whether he really believes it.
Sam Humbert comments:
To all the good arguments for abstention from forecasting, I'd like to add: publicly touting one's views leads to psychological lock-in ('getting married to a position'), because changing one's mind and dumping a losing position will result in a loss of face, in addition to the (perhaps less costly and painful) loss of dollars.
Riz Din adds:
Adding to Steve's point, the problem of 'lock-in' of public forecasts may be exacerbated by the fact that much time and money is often spent generating a forecast and thesis. From the sell-side, creating a unified thesis across research departments is no small feat, and new data that are coming days and weeks may be judged less on their own merits than on how they can be interpreted to fit with this thesis, i.e., going about things backwards. I'm guessing the ability to turn on a dime is a valuable advantage to the likes of Soros and other nimble macro players.
On a separate note, I recall when I was working in the prediction business. It would be about a month or so before the start of a new financial year when clients would call asking for various forecasts for the year ahead, sometimes even further out. I'm sure many of these folk knew better, but they did it any way. They had spreadsheets to fill in.
It reminds me of story about the general who told his team of weather forecasters, "I appreciate being informed that your forecasts are no better than random, but please keep sending them on, as the army needs your predictions for planning purposes."
Charles Humbert extends:
There are three classes of money managers:
1) If your edge is unreliable, or modest to nonexistent, then your best approach is maximum publicity. If you're good at promotion this may lead to much greater benefits than you will derive purely from money management.
2) If your edge is positive but not spectacular, you should try to manage OPM. In this case a little bragging is part of the game; but it must be done with discretion. The goal is to be credible thus attracting investors and increasing your earnings in direct proportion.
3) In the rare case where your edge is outstanding, shut up and trade. If at all possible trade only your own money. Resist the temptation to make your brilliance visible to all. Always keep in mind the goal, which is to last as long as possible before the competition catches up.
Trading is a cutthroat business. If you make it easier for your opponents you eventually make it harder for yourself. The only reason for making public forecasts is to feed your ego. But those who deserve it most are the least well-served by such promotion.
Nigel Davies writes:
One of the tactics that can be used for nobbling a tournament leader is to congratulate him on his fine performance and asking what the secret is. The self-consciousness and commitment induced by a reply can take them out of 'the zone' with a bump. Not that I'd use anything like this myself, it's just something to watch out for if one is in the lead.
I think a similar effect can be at work when players write books. Besides making them a target should they publish anything too valuable, there's a certain inflexibility that can be induced by the 'lock-in' affect of going to print.
J T Holley contributes:
There needs to be if not already a study of the "Power of Anonymity".
It is the spirit of the AA program and one that Mr. Bill must have suggested or he saw this same powerful principle in its possession.
Having quit smoking numerous times, I know that I tried I didn't lick it until I remained anonymous about my intentions. The minute you tell people they will ask you when you bump into them, "still cravin'?" "want to smoke?" "how you doin'?" Even with their good intentions the first thing you do is start thinking about smoking and it simply fuels the fire. Maybe this is why you shouldn't share speculation positions as well.
Doing a quick count I can think of very few times where I've gone out and said something in the touting category and come across a winner. Yet being the anonymous I have risen to the occasion and accomplished magnificent goals. Card games and betting are the horrible exception because one must always be vocal with intentions and can never be silent.
If you look at the risk/reward of touting vs. non-touting it seems so unaligned to me. Even if you tout and succeed then you still lose it seems. You are disliked, set up to be the "one" to knock down and most of the time left doubting the outcome or feeling a Nietzschean withdrawal. Does touting burn unwarranted energy and power as well?
The anonymous one walks freely and has the power. Think of sports when something great happens and the comment is "who was that guy?" This years Masters is a good example.
I think anonymity has got to be the most powerful principle next to compounding.
Anthony Tadlock remarks:
It seems that forecasters and others with the most bearish and pessimistic outlooks don't actually own any stocks and generally never have.
Steve Wisdom replies:
I especially like these standard tropes from bear newsletters: "We advise you to liquidate all stocks," and "We advise you to take profits on stocks now,"… Begging the question: ‘What stocks? If I believed your newsletter, I'd have sold all my stocks years ago.’
Comments
WordPress database error: [Table './dailyspeculations_com_@002d_dailywordpress/wp_comments' is marked as crashed and last (automatic?) repair failed]
SELECT * FROM wp_comments WHERE comment_post_ID = '1764' AND comment_approved = '1' ORDER BY comment_date
Archives
- January 2021
- December 2020
- November 2020
- October 2020
- September 2020
- August 2020
- July 2020
- June 2020
- May 2020
- April 2020
- March 2020
- February 2020
- January 2020
- December 2019
- November 2019
- October 2019
- September 2019
- August 2019
- July 2019
- June 2019
- May 2019
- April 2019
- March 2019
- February 2019
- January 2019
- December 2018
- November 2018
- October 2018
- September 2018
- August 2018
- July 2018
- June 2018
- May 2018
- April 2018
- March 2018
- February 2018
- January 2018
- December 2017
- November 2017
- October 2017
- September 2017
- August 2017
- July 2017
- June 2017
- May 2017
- April 2017
- March 2017
- February 2017
- January 2017
- December 2016
- November 2016
- October 2016
- September 2016
- August 2016
- July 2016
- June 2016
- May 2016
- April 2016
- March 2016
- February 2016
- January 2016
- December 2015
- November 2015
- October 2015
- September 2015
- August 2015
- July 2015
- June 2015
- May 2015
- April 2015
- March 2015
- February 2015
- January 2015
- December 2014
- November 2014
- October 2014
- September 2014
- August 2014
- July 2014
- June 2014
- May 2014
- April 2014
- March 2014
- February 2014
- January 2014
- December 2013
- November 2013
- October 2013
- September 2013
- August 2013
- July 2013
- June 2013
- May 2013
- April 2013
- March 2013
- February 2013
- January 2013
- December 2012
- November 2012
- October 2012
- September 2012
- August 2012
- July 2012
- June 2012
- May 2012
- April 2012
- March 2012
- February 2012
- January 2012
- December 2011
- November 2011
- October 2011
- September 2011
- August 2011
- July 2011
- June 2011
- May 2011
- April 2011
- March 2011
- February 2011
- January 2011
- December 2010
- November 2010
- October 2010
- September 2010
- August 2010
- July 2010
- June 2010
- May 2010
- April 2010
- March 2010
- February 2010
- January 2010
- December 2009
- November 2009
- October 2009
- September 2009
- August 2009
- July 2009
- June 2009
- May 2009
- April 2009
- March 2009
- February 2009
- January 2009
- December 2008
- November 2008
- October 2008
- September 2008
- August 2008
- July 2008
- June 2008
- May 2008
- April 2008
- March 2008
- February 2008
- January 2008
- December 2007
- November 2007
- October 2007
- September 2007
- August 2007
- July 2007
- June 2007
- May 2007
- April 2007
- March 2007
- February 2007
- January 2007
- December 2006
- November 2006
- October 2006
- September 2006
- August 2006
- Older Archives
Resources & Links
- The Letters Prize
- Pre-2007 Victor Niederhoffer Posts
- Vic’s NYC Junto
- Reading List
- Programming in 60 Seconds
- The Objectivist Center
- Foundation for Economic Education
- Tigerchess
- Dick Sears' G.T. Index
- Pre-2007 Daily Speculations
- Laurel & Vics' Worldly Investor Articles