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Is the market going up in 2015?

At the start of the New Year, investors usually turn to thoughts of returns. After strong performances in 2012 and 2013, the Australian equity market was a bit ordinary in 2014, finishing the year at around 5400 points – just marginally higher than where it started. What then, to expect from 2015? Was the recent slowdown indicative of a hot market running out of steam, or a healthy market taking a breather before climbing the next peak?

Clearly what's needed here is an appropriately qualified expert, willing to step in with a well-reasoned prediction against which we might frame an investment plan. For clarity, the prediction should nominate a target level at which the S&P/ASX200 Index will finish the year (plus or minus 100 points).

Investment requires confidence, and to engender confidence, the expert will need to reference some facts and specific detail to make their case compelling. The list of potential facts and details is limited only by the imagination, but some sound choices would include things like GDP growth rates, political stability, interest rates, gearing levels, valuations, historical returns, foreign exchange movements, commodity price movements, consumer and business confidence….the list goes on.

To complete the package, our expert should bring to bear substantial personal credibility - which they will have gained by virtue of their profile in the investment world – and they should be willing to make their case with the confidence and force the befits a well-reasoned prediction from a credible expert.

All parties are happy here: investors have the waypoints they need to navigate often treacherous investment waters, the expert enhances their profile by setting out for a wide audience their well-reasoned arguments, and the media provides a channel by which all of this is brought together. Everyone's a winner.

At least, everyone would be a winner if markets were amenable to being predicted in this way. Unfortunately, the evidence doesn't seem to bear that out. Unhelpfully, the evidence seems to point to markets being highly unpredictable beasts, driven more in the short term by the collective mood swings of large numbers of human beings, and less by rational argument.

One interesting piece of work on the value of expert predictions was done by Philip Tetlock, who teaches at the University of Pennsylvania. Over a twenty year period, Tetlock systematically gathered 82,361 predictions from 284 people who made their living "commenting or offering advice on political and economic trends."

Some of the conclusions that emerged from Tetlock's work included:

  • The forecasts provided by experts did not perform noticeably better than forecasts generated by non-experts, random chance or simple rules;
  • The experts were rarely held accountable for their forecasts; and
  • Those experts with the highest profile, tended to be slightly less accurate than those less well known.

The problem seems to be one of complexity. Even with the best will in the world, highly complex systems don't lend themselves to forecasting, even by experts with many years of experience. The stock market is such a system.

What these experts can do effectively, however, is entertain. Their forecasts might not have great predictive value, but people still want to hear them. Perhaps in a funny kind of a way, everyone really is a winner.

With that in mind, you may be interested to hear that our view on the S&P/ASX200 Index is that it should finish the year at around 5724 points, ±100.

Of course, if your goal is long term investment success, you might prefer to spend less time being entertained and more time making sound investment choices. If that is the case, I suggest the following:

  • think long-term;
  • be wary of the ability of expert commentators to deliver you quick, easy wins;
  • be especially wary of forecasts of the unforecastable; and
  • be willing to think for yourself.

Not very entertaining, I know.

 
Roger Montgomery
Roger Montgomery

Roger shares his stock market insights at his Insights blog, blog.rogermontogmery.com. Investors can also follow Roger on Facebook and watch media interviews at his YouTube channel. Grab your Second Edition copy of Value.able and learn how Roger Montgomery values the best stocks and buys them for less than they're worth. Grab the book now at special price!