In a recent column, Noah Solomon challenges the value of forecasting in investing, asserting that even accurate predictions rarely translate into superior returns. Drawing on H.L. Mencken's quote, 'We are here and it is now. Further than that, all human knowledge is moonshine,' Solomon emphasizes the futility of relying on forecasts for investment success.
The Illusion of Forecast Accuracy
Solomon acknowledges that forecasts can sometimes be correct, but he argues that accuracy alone is insufficient. The key to outperformance lies not in being right, but in being more right than the consensus. He explains that stock prices react only to earnings surprises—deviations from what most investors expect. If a company reports earnings that match the consensus, the stock price typically remains unchanged, regardless of whether earnings rose or fell.
Consensus vs. Contrarian Views
The consensus forecast is correct most of the time, which means contrarian views are often wrong. To achieve above-average results, an investor must hold a non-consensus view that also proves accurate. This combination is rare, as non-consensus forecasts are inherently risky and frequently incorrect.
Solomon compares this to being chased by a bear: survival doesn't require outrunning the bear, only the person next to you. Similarly, investment success depends on being more accurate than others, not just accurate in absolute terms.
The Pitfalls of Incremental Forecasting
Most forecasters rely on incremental changes from current conditions, assuming that trends will persist. Economic expansions and bull markets often last years, and rising stocks tend to continue rising. While this approach works most of the time, it fails precisely when it matters most—during market turning points. When the trend reverses, incremental forecasts lead to significant losses.
Solomon concludes that investors are better off adhering to sound, time-tested principles rather than chasing forecasts. Patience, diversification, and a long-term perspective have historically provided more reliable results than attempts to predict short-term market movements.
Ultimately, the article reinforces the idea that humility and discipline are more valuable than prediction in the unpredictable world of investing.
