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Market Forecasts & the Value of Predictions

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Why We Don’t Offer Market Forecasts

It’s that time of year again, when every ana­lyst and finan­cial com­pa­ny is rush­ing to pub­lish their mar­ket fore­casts,  opin­ions, and pre­dic­tions. Let’s see some 2017 mar­ket fore­casts:


At Swan, we fre­quent­ly get asked for our own mar­ket fore­cast. So here is our very own high­ly com­plex and thor­ough­ly researched 2017 mar­ket fore­cast:

The mar­kets will do one of three things in 2017: go up, go down, or stay flat.

Not exact­ly going out on a limb with that fore­cast, are we? This response might seem a lit­tle blasé, but it’s tru­ly what we believe. There are two very good rea­sons why we don’t put out the tra­di­tion­al mar­ket fore­cast that the finan­cial indus­try reg­u­lar­ly churns out.

  1. We don’t know what the mar­kets are going to do.
  1. We don’t care.

Wait, what?!?  But there are so many oth­ers clam­or­ing to get out their new year mar­ket fore­casts…

Allow me to explain:

1. We don’t know what the markets will do, and no one else knows either!

If some­one tells you they know what the mar­kets will do, espe­cial­ly an “expert,” run away. Fast. No one can pre­dict the future, and admit­ting those three words, “I don’t know,” are impor­tant ones in invest­ing.

You may be think­ing to your­self, “Isn’t it pru­dent to make an edu­cat­ed guess, even if you don’t know?”

Sure, experts and ana­lysts will like­ly admit that they don’t “know” what the mar­kets will do, that their fore­cast is just a guess or expec­ta­tion of returns the mar­kets might pro­duce. Experts pre­dict­ing the future have a very bad track record. There are many that look at fore­cast­ing as just prob­a­bil­i­ty-based guess­work, built around a dynam­ic and com­plex sys­tem.

So what’s the harm in guess­ing?”  

The prob­lem with fore­cast­ing is that it leads to bias. Frankly, we don’t want to have a bias on the mar­ket; a bias leads to incon­sis­ten­cy, unpre­dictabil­i­ty, and the poten­tial for mas­sive diver­gence in out­comes.


Even a blind squirrel finds a nut once in a while.’

Even though oth­ers might fore­cast based on var­i­ous fac­tors, fun­da­men­tals, or tech­ni­cal analy­sis, the fact of the mat­ter is that if you make enough pre­dic­tions, you’re bound to be right on occa­sion.

This can lead to the bad idea that there’s val­ue in let­ting pre­dic­tions influ­ence your deci­sions. There’s no way to know ahead of time which fore­casts and pre­dic­tions will be right. Thus, it’s bet­ter to ignore them.


Market Forecasts Examined

One of my favorite fel­low research nerds is the extreme­ly smart Char­lie Bilel­lo, Direc­tor of Research at Pen­sion Part­ners. His year in review of 2016 high­light­ed many exam­ples of failed fore­casts, pre­dic­tions, and expert opin­ions through­out the year. For exam­ple, Char­lie shared these fore­casts by RBS, Jeff Gund­luch, and Den­nis Gart­man near the begin­ning of the year:



Bilel­lo quotes Jeff Gund­luch: “If you’re going to do any­thing in emerg­ing mar­ket equi­ties, my rec­om­men­da­tion is to short them. They may fall a fur­ther 40%.” Emerg­ing Mar­kets, by the way, end­ed up over 10% on the year and bot­tomed out in mid-Jan­u­ary around the time of Gundluch’s quote.

Bilel­lo con­tin­ues by refer­ring to Den­nis Gart­man who “said crude oil wouldn’t ‘see $44 again” in his life­time.” At the time, oil was trad­ing at around $30. Bilel­lo goes on to write, “Crude would end April over 77% from its Feb­ru­ary low, one of the largest short-term ral­lies in his­to­ry (the spike in 1990 was larg­er). Yes, it was back above $44.”

Oth­er seem­ing­ly impos­si­ble events occurred in 2016, sur­pris­ing many experts and fore­casts, such as the Brex­it vote and the Trump elec­tion, as well as neg­a­tive yields on 50-year bonds in Switzer­land.

Bilel­lo sums up the game of pre­dic­tions and fore­casts well at the end of his review: “Be for­ev­er hum­ble and thank­ful, and leave the pre­dic­tions to those whose job it is to enter­tain.”

Experts aren’t that bad, right?”

 They’re all bound to be wrong every now and then. Well, CXO Advi­so­ry has for­tu­nate­ly been track­ing expert fore­casts for quite some time, more than 6,500 of them from 1998 to 2012, and it doesn’t look good for the experts.

The fol­low­ing chart tracks the incep­tion-to-date accu­ra­cy of all 6,582 grad­ed fore­casts in the sam­ple. The extreme val­ues ear­ly in the sam­ple peri­od relate to small cumu­la­tive sam­ples. Ter­mi­nal accu­ra­cy is 46.9%, an aggre­gate val­ue very steady since the end of 2006, even as the num­ber of fore­casts con­tin­ues to grow.




That’s right — only a 46.9% ter­mi­nal accu­ra­cy rate.  So, lis­ten to expert fore­casts or flip a coin? Take your pick.

 2. We don’t care which direction the markets go.

 As stat­ed, the mar­ket can do one of three things: it can go up, it can go down, or it can stay flat. This leads to my sec­ond bold-sound­ing state­ment: we don’t care that much about what the mar­kets do.


Because we are pre­pared for any of those three pos­si­bil­i­ties.

Our invest­ment process is built around the con­cept that defin­ing risk and lim­it­ing large loss­es is the first step to suc­cess­ful and con­sis­tent long-term invest­ing. Because of this, we are always hedged to pro­tect against large loss­es should the mar­ket go down.

In addi­tion, because we believe it is dif­fi­cult to pre­dict and time mar­kets, we are always invest­ed. Because of this unique always invest­ed invest­ment approach, we do not rely on guess­work or mar­ket fore­casts to make our invest­ment deci­sions. Instead, the struc­ture of our port­fo­lio hold­ings gen­er­ates what we like to refer to as a Tar­get Return Band, a band that shows where we esti­mate our returns to be based on what the mar­ket does for that year.



Each year we focus on deliv­er­ing returns with­in this Tar­get Return Band, not on beat­ing the mar­ket in the short-term or seek­ing to adjust our strat­e­gy or hold­ings in the hope that our fore­casts are cor­rect. Although we would pre­fer the mar­ket to move up, we also would be fine with it going down and poten­tial­ly giv­ing us the oppor­tu­ni­ty to prof­it on our hedge to buy more of the mar­ket at low­er lev­els.

Our always invest­ed, always hedged approach has served investors in the DRS well for almost twen­ty years now – lead­ing to a less volatile and long-term mar­ket-beat­ing out­come.

We are very pleased to report that all of our DRS strate­gies returned with­in the tar­get return band in 2016 and we will aim for sim­i­lar results in 2017, no mat­ter what the mar­kets do.


The Bottom Line

Chas­ing per­for­mance and invest­ing based on pre­dic­tions by experts almost always ends bad­ly. In the long run, you’ll be hap­pi­er pro­tect­ing against large loss­es, seek­ing to lim­it volatil­i­ty, and avoid­ing uncer­tain out­comes, bias­es, and pre­dic­tions.

At Swan, we have pur­pose­ful­ly decid­ed to be geo­graph­i­cal­ly and philo­soph­i­cal­ly dif­fer­ent from Wall Street by hav­ing an inde­pen­dent and non-tra­di­tion­al approach to invest­ment man­age­ment. Our invest­ment phi­los­o­phy is that stock pick­ing and mar­ket tim­ing is a very dif­fi­cult under­tak­ing and risky, very rarely lead­ing to long-term suc­cess and con­sis­tent out­comes.

So our 2017 fore­cast at Swan is this:

  • Par­tial­ly sun­ny, but cloudy with a chance of rain: fore­cast uncer­tain.
  • Umbrel­la in hand, pre­pared for what­ev­er hap­pens.

Here’s to a pros­per­ous, peace­ful, and hap­py 2017.



Micah Wakefield - Director of Research and Product Development - Swan Global InvestmentsAbout the author: Mic­ah Wake­field, CAIA®, Direc­tor of Research and Prod­uct Devel­op­ment, is a part of the invest­ment man­age­ment team at Swan and focus­es on research and analy­sis, strate­gic plan­ning, and prod­uct devel­op­ment. Pri­or to join­ing Swan, Mic­ah was the Direc­tor of Oper­a­tions and Trad­ing at an invest­ment advi­so­ry firm.



Impor­tant Notes and Dis­clo­sures:

Swan Glob­al Invest­ments, LLC is a SEC reg­is­tered Invest­ment Advi­sor that spe­cial­izes in man­ag­ing mon­ey using the pro­pri­etary Defined Risk Strat­e­gy (“DRS”). SEC reg­is­tra­tion does not denote any spe­cial train­ing or qual­i­fi­ca­tion con­ferred by the SEC. Swan offers and man­ages the DRS for investors includ­ing indi­vid­u­als, insti­tu­tions and oth­er invest­ment advi­sor firms. Any his­tor­i­cal num­bers, awards and recog­ni­tions pre­sent­ed are based on the per­for­mance of a (GIPS®) com­pos­ite, Swan’s DRS Select Com­pos­ite, which includes non-qual­i­fied dis­cre­tionary accounts invest­ed in since incep­tion, July 1997, and are net of fees and expens­es. Swan claims com­pli­ance with the Glob­al Invest­ment Per­for­mance Stan­dards (GIPS®). All Swan prod­ucts uti­lize the Defined Risk Strat­e­gy (“DRS”), but may vary by asset class, reg­u­la­to­ry offer­ing type, etc. Accord­ing­ly, all Swan DRS prod­uct offer­ings will have dif­fer­ent per­for­mance results, and com­par­ing results among the Swan prod­ucts and com­pos­ites may be of lim­it­ed use.  All data used here­in; includ­ing the sta­tis­ti­cal infor­ma­tion, ver­i­fi­ca­tion and per­for­mance reports are avail­able upon request. The S&P 500 Index is a mar­ket cap weight­ed index of 500 wide­ly held stocks often used as a proxy for the over­all U.S. equi­ty mar­ket. Index­es are unman­aged and have no fees or expens­es. An invest­ment can­not be made direct­ly in an index. Swan’s invest­ments may con­sist of secu­ri­ties which vary sig­nif­i­cant­ly from those in the bench­mark index­es list­ed above and per­for­mance cal­cu­la­tion meth­ods may not be entire­ly com­pa­ra­ble. Accord­ing­ly, com­par­ing results shown to those of such index­es may be of lim­it­ed use. The adviser’s depen­dence on its DRS process and judg­ments about the attrac­tive­ness, val­ue and poten­tial appre­ci­a­tion of par­tic­u­lar ETFs and options in which the advis­er invests or writes may prove to be incor­rect and may not pro­duce the desired results. There is no guar­an­tee any invest­ment or the DRS will meet its objec­tives. All invest­ments involve the risk of poten­tial invest­ment loss­es as well as the poten­tial for invest­ment gains. Pri­or per­for­mance is not a guar­an­tee of future results and there can be no assur­ance, and investors should not assume, that future per­for­mance will be com­pa­ra­ble to past per­for­mance. All invest­ment strate­gies have the poten­tial for prof­it or loss. Fur­ther infor­ma­tion is avail­able upon request by con­tact­ing the com­pa­ny direct­ly at 970.382.8901 or vis­it swanglobalinvestments.com013-SGI-011917

By |2018-10-02T11:24:29+00:00January 19th, 2017|Blog|Comments Off on Market Forecasts & the Value of Predictions