Russell has just released the strategist team’s market outlook for 2013. It’s a high-caliber team, and the outlook covers a lot of ground, so I won’t spoil the story by attempting to summarize it here. Instead, I’m going to veer off into the philosophical: are we really doing anyone any good by attempting to forecast the future? After all, nobody in the investment world is under the illusion that our experts (or anyone else’s) really know what is going to happen next year.
The key is to remember that even though nobody knows exactly what the future holds, that doesn’t mean we know nothing at all about it. This distinction is described by Nate Silver in his recent book “The Signal and the Noise”¹ as a difference between prediction and forecasting. He says:
“The words predict and forecast are largely used interchangeably today, but in Shakespeare’s time, they meant different things. A prediction was what the soothsayer told you… a forecast typically implied planning under conditions of uncertainty.”
So, by Silver’s definitions, a prediction is specific, while a forecast is about probability². The dilemma for every market commentator is that even though honesty would demand assessments of the future based on probabilities, those are a lot less interesting to listen to than the specific. A specific outcome is easy to understand, simple to grasp. Personally, I like to hear specific predictions, not because they really tell me what will happen, but because they can provide insight into why those things might happen. But market commentary can descend into an entertainment game at the expense of meaningful communication (if anyone has an alternative explanation for the popularity of Jim Cramer’s Mad Money, please let me know). The most thoughtful analysis, meanwhile, is often trapped in the weather forecaster’s dull mantra of a 30% chance of rain tomorrow – and is largely ignored as a result.
So let me apologize in advance if in places our team appears to be playing the soothsayer (they aren’t) or if elsewhere they appear to be hedging their bets. Walking the line between the prediction rock and the forecasting hard place is a tough act for any market commentator.
¹ Source: Nate Silver (2012) “The Signal and the Noise: Why Most Predictions Fail but Some Don’t.” Penguin Press.
² Given that he stresses he is in the forecasting business, not the prediction business, it is perhaps ironic that Silver – who is best-known for his political analysis – is feted for having called all 50 states correctly in the most recent presidential election, and all bar one in 2008. His blog is at www.fivethirtyeight.com.