I had an annual review meeting with a client a few weeks back and as we were wrapping it up he asked me what I thought of Royal Dutch Shell as an investment. I commented I didn’t have an opinion but would provide one once I looked at the chart. He went on to say he was watching CNBC and (Jim) Cramer was promoting the stock. I went on to tell him that the evidence supports that you would have had a better chance of making money by flipping a coin than following in his calls. In fact, you would have made more money if you had done just the opposite of what he said. Without skipping a beat my client said “he can’t be wrong all the time can he?”
There have been many studies done that show that “experts” (I prefer not to get into a debate on whether Mr. Cramer is an “expert”) as a whole don’t provide better recommendations than flipping a coin. An example of such a study is where they initially asked 3 groups to predict the future price of a security initially given 6 pieces of relevant information. What they found was all three groups (experts, a computer and those deemed “financially unsavvy”) all performed equally, none better than a coin flip. The second part of the study continued to progressively deliver more and more relevant information about the security until they were given 20 pieces in total. What they found was quite interesting. The computer improved its ability to forecast (increased to more than 60%), the financially unsavvy had no change (stayed at 50-50) but the “experts” ability fell from 50% to near 20%. There are reasons why this happen and for the sake of brevity it’s not relevant to this post. What is relevant is anyone listening and then acting on forecasts or predictions of the financial future will likely be disappointed.
The CXO Advisory Group (you can find more information here) provides a great service (some free some is subscription) where they deliver objective research and reviews to aid investing decisions. The thing I found most interesting is their “guru grades” (this section is free) where they assess the forecasting acumen of stock market “gurus” as a group and rank them as individuals according to their accuracy. In the paragraphs following this one, I have cut and pasted the results from their webpage. I am sure you have heard of some of the names covered but most will likely be recognizable only to industry insiders. Please keep in mind, there are always risks in drawing conclusions about individual results, especially those with small sample sizes. What their results do illustrate (and reinforce from numerous studies) is there are a few that get it right more often than not but on the whole, you would be no better off than if you flipped a coin. Forewarned is forearmed when it comes to listening to the noise on the financial networks and those who consistently attempt to forecast the future.
Individual Grading Results
The following table lists the gurus graded, along with associated number of forecasts graded and accuracy. Names link to individual guru descriptions and forecast records. Further links to the source forecast archives embedded in these records are in some cases defunct. It appears that a forecasting accuracy as high as 70% is quite rare.
Cautions regarding interpretation of accuracies include:
Forecast samples for some gurus are small (especially in terms of forecasts formed on completely new information), limiting confidence in their estimated accuracies.Differences in forecast horizon may affect grades, with a long-range forecaster naturally tending to beat a short-range forecaster (see “Notes on Variability of Stock Market Returns”).Accuracies of different experts often cover different time frames according to the data available. An expert who is stuck on bullish (bearish) would tend to outperform in a rising (declining) stock market. This effect tends to cancel in aggregate.The private (for example, paid subscription) forecasts of gurus may be timelier and more accurate than the forecasts they are willing to offer publicly.
And in case you are interested … Royal Dutch Shell is down more than 10% from the day I had my client meeting.