A Look at the Best and Worst Stock Oracles

“(MoneyWatch) The financial media tends to focus most of its attention on stock market forecasts by purported investment gurus. They do so because they know that’s what gets the public’s attention. Investors must believe they have value or they wouldn’t tune in. Nor would they subscribe to investment newsletters, nor publications like Barron’s that claim to provide you with “news before the markets know.”

Unfortunately for investors, there’s a whole body of evidence demonstrating that market forecasts have no value (though they provide me with plenty of fodder for my blog) — the accuracy of forecasts is no better than one would randomly expect. For investors who haven’t learned that forecasts should only be considered as entertainment, or what Jane Bryant Quinn called investment porn, they actually have negative value because forecasts can cause them to stray from well-developed plans.

The latest piece of evidence illustrating the futility of forecasts comes from CXO Advisory Group. The investor research firm set out to determine if stock market experts, whether self-proclaimed or endorsed by others,  provide useful guidance on how to time the stock market. To find the answer, from 2005 through 2012 they collected and investigated roughly 6,600 forecasts for the U.S. stock market offered publicly by 68 experts, bulls and bears employing technical, fundamental and sentiment indicators. Their collection included forecasts, all of which were publicly available on the Internet and which went back as far as the end of 1998. They selected experts based on Web searches for public archives with enough forecasts spanning enough market conditions to gauge their broader accuracy.

CXO’s methodology was to compare forecasts for the U.S. stock market to the S&P 500 index returns over the future intervals most relevant to the forecast horizon. They excluded forecasts that were too vague and forecasts that included conditions requiring consideration of data other than stock market returns. They matched the frequency of a guru’s commentaries (such as weekly or monthly) to the forecast horizon, unless the forecast specified some other timing. And importantly, they took into account the long-run empirical behavior of the S&P 500 index. For example, if a guru said investors should be bullish on U.S. stocks over the year, and the S&P 500 index was up by just a few percent, they judged the call incorrect (because the long-term average annual return has been much higher). Finally, they graded complex forecasts with elements proving both correct and incorrect as both right and wrong (not half right and half wrong).

The following is a summary of CXO’s findings….”

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