Predictions are funny.
Despite evidence of failure, people love making predictions. We love to sound smart. Given the choice to sound stupid, or smart - we would choose smart every time.
Every year, between November and February there are an unbelievable number of sessions run by investment professionals titled something like, “Annual Market Outlook.” The number of people, researchers, and other resources allocated towards projects like this is astronomical.
The funny thing is, no one ever checks on how the predictions did.
Because it doesn't matter.
A line spoken too often in the investment world is "we'll have a recession at some point, but I don't see one anytime soon." I cannot recall how many times I've heard this one - it makes me cringe. Of course you don’t see a recession on the horizon.
“Making predictions is difficult, especially about the future.”
There is a great excerpt on predictions in Range, the bestselling book by David Epstein.
In 1984, a researcher by the name of Philip Tetlock began the "most important study ever conducted on Expert predictions.” The study involved 82,361 predictions. 284 experts with an average of 12 years of experience in their field.
The results were astounding. "Impossible Events" deemed by experts occurred 15% of the time. When they declared events to be a “sure thing”, more than 25% of them failed to transpire.
Experts who are obsessed with their own predictions either end up being right, or there is a reason for why they were wrong. "If this one thing happened I would have been right." Using this logic, they are undefeated in their minds. It reminds me of gamblers who only remember their wins. The losses? That was just bad luck.
In the study, many experts never admitted systematic flaws in their judgement. Tetlock said, "there is often a curiously inverse relationship between how well forecasters thought they were doing and how well they did.”
In Tetlock’s book, Superforecasters, he described a small portion of the group that did significantly better than average. The worst forecasters were those with great self-confidence who really stuck to their big ideas. The ‘hedgehogs’, as Tetlock dubbed them, were typically worse than the dart-throwing chimps in his study. The most successful forecasters were those who were cautious, humble, actively open-minded, considered many points of view, and updated their predictions. He called them ‘foxes’. Naturally, TV shows recruit hedgehogs as they are more entertaining. The takeaway for Tetlock: the more likely an expert was to appear on TV, the less accurate they usually were.
In investing there is a saying. “I was not wrong, I was just early.” Predicting that ABC stock is going to rise from $20 to $30. If it does: you’re right. If it doesn’t: you just have to wait longer.
Enter Scott Galloway. Scott is an extremely intelligent man. I’ve bought and enjoyed one of his books. He’s a businessman, a professor, media personality, the list goes on. When he speaks, people believe a lot of what he says. I am no different. He’s an intelligent marketer with a lot of conviction.
When he speaks, he often makes predictions about tech companies. They are well informed and seem totally obvious as the words come out of his mouth. They sound so obvious that sometimes I will think to myself, “why didn’t I think of that?”
If you asked me if I would ever invest in a tech company based on his opinion - my gut answer would be yes.
If I had done that, the joke may have been on me.
Because Scott, is no different than a lot of us. He can’t predict the future.
On October 4th, 2019 he made a bunch of predictions. And he was incredibly convincing. I remember the article going quite viral. He listed companies as “overvalued unicorns” or companies that could lose “80% or more of their value.” Eight of these companies are publicly traded, the others he listed are private so we cannot accurately check in on them.
Someone recently checked in on those companies to see how they were doing after 8-plus months. A very short period of time, yes. The results? Staggering. If you would have bought a share in each public company that he was betting against, you would have been up 61.5% as of June 17, 2020. In other words, going the opposite direction of Scott would have led to a performance 11.2 times better than the S&P 500.
There is one more prediction worth sharing. A prediction that makes the last one look good.
Five years ago, in 2015, he stated that Macy’s would be the most successful retailer over the next five years, over Amazon. Macy’s is fighting to avoid bankruptcy. Amazon is up over 500%
It is worth repeating that I am not piling on Scott Galloway. I like the guy. He is brilliant and entertaining. I’ve purchased his latest book. I read the book. I enjoyed the book.
It’s also worth mentioning that he could still end up being right. There is a chance in 10 years that I look back and wish I set some money aside to allocate towards his predictions. Maybe he’s not wrong and he’s just early.
Enter Peter Lynch.
Peter Lynch is one the greatest investors of all-time. He managed the best performing mutual fund of all time. He managed a fund for 13 years and it was the greatest 13-year run we will ever see. In a letter written in 1991, he was commenting about how he missed out on investing in Microsoft. He believed he was late to the game.
Microsoft has climbed another 13,300% since 1991.
“Forecasts may tell you a great deal about the forecaster, they tell you nothing about the future.” - Warren Buffett
There are an unlimited amount of examples. They occur every day. And people react to the predictions as if they are fact. Not just “regular people” or “retail investors”, I see it with investment professionals all the time.
I still recall another prominent investor, Jeremy Grantham, giving early 2018 guidance go all in on Emerging Markets, or as much as your “career can tolerate.” Many reacted as if he had a crystal ball. The prediction wasn’t surprising, the reaction was.
That one hasn’t worked out. Yet.
The Bitcoin experts of late-2017 making predictions about the price going up to $50,000, $100,000, and even $1,000,000 by the end of 2020. Today the price is around $9,000. It’s bounced between $3,000 and $12,000 since the 2017 peak.
As our friend Nick Maggiulli referenced in one his recent pieces, Steve Jobs predicted the Segway would be bigger than the Personal Computer.
Elon Musk, who could start his own religion right now, said this about COVID-19 on March 19. “probably close to zero new cases by end of April.”
There are two primary questions that we need answered.
Why do people keep trying this? Why doesn’t anyone hold them accountable if they’re wrong?
No one cares enough to remember, as Maggiulli pointed out in his article.
A normal twitter post by Musk will garner thousands of responses. When someone tried to call him out on his failed COVID prediction? Crickets. No one noticed, or cared.
If you think about it, it makes total sense to make predictions.
It sounds preposterous but this is the best analogy I can think of.
Imagine you’re at blackjack table, or any casino game, playing $5 hands.
After you win a hand, you can go back in time and adjust your bet to $20, or $100, or $1,000. In reality, you can change it as high as you can go. If you lose the hand, you’ve only lost $5.
This is what making predictions in public is like.
If you lose? No sweat, people will forget. No one cares, your career wasn’t on the line.
If you win? You can double down. You can shout it from the roof tops. TV, friends, family, social media, colleagues, anyone you know. Any platform you have. You can tell anyone who will listen to you as many times as they can tolerate.
You can cement it into their memory. You can even become “the person who predicted (fill in the blank).” It is the ultimate risk/reward trade-off.
As I was writing this, a headline came up on LinkedIn. “Twitter’s stock jumps after news of…”
Guess who shared that article that caused me to see it?
Scott Galloway.
He wrote, “And who told you this would happen?”