Hello and welcome to this month's edition of Investment insights.

We regularly look at forecasting in the articles we include in this publication but a recent article is of particular interest so it has been highlighted as the feature piece for this month.

The article titled "Can Stock Market Forecasters Forecast?" by Alfred Cowles, included some extremely interesting research across a number of different sectors of the market. The highlights included:

  • Sixteen financial services firms who regularly sent their subscribers a list of recommended stocks which when reviewed, included some 7,500 separate recommendations. Only six of the sixteen firms were able to recommend stock purchases that produced gains during the period of study. The average annual rate of return for all sixteen firms' recommendations was less than the stock market's average annual return for the time period studied.
  • A second analysis looked at the stock purchases of twenty Fund Managers. These managers were some of the largest and most experienced stock market investors. The annualized return during the four years under study ranged from a gain of 27% to a loss of 34%. Just as with the financial services firms, the average annual return was less than the stock market's average annual return for the time period studied.
  • Finally, more than 3,000 forecasts made by twenty-five financial publications over four years were studied. The recommendations of only eight of the publications produced a positive annualized rate of return. As a group, the average performance was 4% less than the market - essentially, 4% less than what would be expected from a random selection of stocks.

This certainly supports the thesis that following the advice of market forecasters does not lead to superior returns, or in the words of the author of the paper, Alfred Cowles, "This would seem to indicate that, in general, these stock market forecasters failed to accomplish their objectives."

Perhaps of even more interest is the fact that this research was conducted between January 1929 and July 1932 and was first published in July of 1933!

Daniel Minihan, Director of Wealth Management, has written about the difficulties of both forecasting, and the follies of following those forecasters for your own portfolio in a number of pieces including this piece on consensus forecasting, whilst this piece looks at the even trickier world of currency forecasting.

If you would like to read the original research by Cowles from 1933 click here for the PDF. To read the recent article from Marketwatch that references it (and makes some great points about the talking heads on TV), click here

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