It’s interesting to hear “experts” in the oil industry expound on the future price direction of oil.  Often these interviewed experts are the CEOs of major oil companies.  Many say the current price of oil ($50 a barrel) is temporary and will eventually trade back toward $100.  But not one was prescient in forecasting the recent 50% decline.  So what qualifies them to now predict a rise?

The other day there was another significant forecasting failure.  This time it was in economics.  The monthly increase in employment numbers came in not at the consensus forecast of +245,000, but +126,000.  That’s close to a 50% error.  According to Bloomberg News, a survey of 98 economists revealed there was not a single forecast remotely close to the reported number.  So why do we even listen to forecasts of these, or other “experts?” I believe it’s because most of us innately want experts to tell us what to do, or at the least what to expect.

Of course, we would like to know what to expect in life.  It’s in our genetic coding.  We want to protect ourselves so anyone who can seemingly forecast the future is very welcome.  If a forecaster guesses correctly, they are publically anointed with guru status.   And in the investment business, which is all about money, guru status is revered.  As a consequence, we have economists, market strategists, and stock market analysts all making predictions.  They are constantly making forecasts of company earnings, economic activity, and global market impacting trends.  These are future events that no one really has a chance of getting correct on a consistent basis.   Yet, we still want to hear them.

That is because once in a while someone will get a forecast totally right and is instantly elevated to major expert status.  Dr. Nouriel Roubini and Meredith Whitney are two recent examples.  The former supposedly predicted the debt crisis and Whitney the banking crisis.  However, both have predicted many other things, before and after, that did not happen.  This raises the question of how can anyone get a forecast right?  The answer is very simple.  There are so many people making forecasts that it is inevitable someone will get one right … at least for a moment in time.  They then feel empowered to make additional forecasts until, inevitably, they lose their newly acquired guru status.

So if we cannot depend on individuals to forecast correctly, how about the wisdom of crowds?  In the stock market unrelated people “gather” as buyers and sellers.  Their purpose is price discovery; what is something worth at a given moment in time?  Some in the crowd are naturally smarter.  Others have worked harder, or have more information or perhaps have better judgment.  Some might even have insights into a business or have information that others do not have.  Overall, it is the collective wisdom of the crowd that determines price.  Relative price strength analysis helps us in determining that collective wisdom.  It drives our investment methodology.   And who wouldn’t want to have a crowd’s wisdom over the one off forecast of a new transient celebrity guru?

Francis Patrick Boland