Can Experts Predict The Stock Market’s Direction?

It makes sense that the world’s fastest growing economies produce the best stock returns. 

But what “makes sense” doesn’t always align with reality.

Consider China for a moment.  In my book, Millionaire Teacher, I provided a table demonstrating that China’s GDP grew a staggering 9.61 percent annually between 1993 and 2008.

By comparison, U.S. economic GDP increased by less than 3 percent annually over the same time period.

Did China’s stock market outperform the U.S. market?

Not even close. According to Bloomberg, the Chinese stock index has made only 1% since 1993; meanwhile, the S&P 500 has gained 455%.

Since 2008, as measured by the iShares Large Cap Chinese index, Chinese stocks have dropped 38.2 percent to August 30, 2013.

Here’s a comparative Morningstar chart, based on their relative performances since 2008:

U.S. Stock Market (in yellow) versus the Chinese Stock Market in Blue.

Note that since 2008, the U.S. market has gained 17.49 percent, as measured by Vanguard’s Total Stock Market Index. China’s market, by comparison, shows a 38.2 percent decline. 

Am I suggesting that you avoid Chinese stocks? 

No.  Chinese stocks could do very well in the future.  Stock markets, however, are a lot less predictable than many expert “forecasts” might suggest.

Rather than trying to pick what stock market will outperform this year or next, it’s better to diversify across a variety of markets and rebalance annually. Doing so will ensure that you sell a little bit of what rises, and buy a little bit of what falls.

If you still think that predicting the market’s direction is common sense, or that some expert can do it for you, consider what Warren Buffett has to say:

“We’ve long felt [he and his co-chairman Charlie Munger] that the only value of stock forecasters is to make fortune tellers look good.”

 A data-crunching firm called CXO Advisory puts dozens of the world’s highest profile financial forecasters to the test. 

When these “experts” publicize their stock market predictions, the company tracks whether or not they end up being right.  If you believe that the talking heads on CNBC or the experts profiled in the Wall Street Journal are worth listening to, I’m sorry to disappoint you.  Between 2005 and 2012, CXO Advisory collected 6,584 forecasts by 68 experts. 

When predicting the direction of the stock market, they were right just 46.9% of the time.  Speculators, it seems, are better off flipping coins.  http://www.cxoadvisory.com/gurus/ 

What’s the moral of the story?

For starters, few people would expect that the Chinese market has been a disaster for 20 years, despite its GDP growth.  Don’t use a country’s growth prospects to determine your investment decisions.

Second, don’t give weight to any forecaster’s story.

Keep your costs low, diversify, keep a cool head, and you’ll make far more money than most.