Hello and welcome to this month's edition of Investment
We regularly look at forecasting in the articles we include in
this publication but a recent article is of particular interest so
it has been highlighted as the feature piece for this month.
The article titled "Can Stock Market Forecasters
Forecast?" by Alfred Cowles, included some extremely
interesting research across a number of different sectors of the
market. The highlights included:
Sixteen financial services firms who regularly sent their
subscribers a list of recommended stocks which when reviewed,
included some 7,500 separate recommendations. Only six of the
sixteen firms were able to recommend stock purchases that produced
gains during the period of study. The average annual rate of return
for all sixteen firms' recommendations was less than the stock
market's average annual return for the time period
A second analysis looked at the stock purchases of twenty Fund
Managers. These managers were some of the largest and most
experienced stock market investors. The annualized return during
the four years under study ranged from a gain of 27% to a loss of
34%. Just as with the financial services firms, the average annual
return was less than the stock market's average annual return
for the time period studied.
Finally, more than 3,000 forecasts made by twenty-five
financial publications over four years were studied. The
recommendations of only eight of the publications produced a
positive annualized rate of return. As a group, the average
performance was 4% less than the market - essentially, 4% less than
what would be expected from a random selection of stocks.
This certainly supports the thesis that following the advice of
market forecasters does not lead to superior returns, or in the
words of the author of the paper, Alfred Cowles, "This
would seem to indicate that, in general, these stock market
forecasters failed to accomplish their objectives."
Perhaps of even more interest is the fact that this research
was conducted between January 1929 and July 1932 and was first
published in July of 1933!
Daniel Minihan, Director of Wealth Management, has written about
the difficulties of both forecasting, and the follies of following
those forecasters for your own portfolio in a number of pieces
this piece on consensus forecasting, whilst
this piece looks at the even trickier world of currency
If you would like to read the original research by Cowles from
click here for the PDF. To read the recent article from
Marketwatch that references it (and makes some great points about
the talking heads on TV), click
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