Zenda
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By Cliff D'Arcy
One of my favourite quotes from the financial world - often used to describe the behaviour of economists, stock-market pundits and so on - is:
"Forecasting is like trying to drive a car blindfolded, following directions given by a person looking out of the back window."
It seems particularly apt at this time of year, when analysts at the big investment banks and brokers present their predictions for the year-end level of the FTSE 100 (^FTSE - news) in twelve months' time.
Here are six of the latest offerings, ranked from least to most optimistic:
Company FTSE prediction Percentage rise*
Morgan Stanley 4,500 - 1.2%
HSBC 4,700 - 5.7%
Goldman Sachs 4,800 - 8.0%
Lehman Brothers 4,900 - 10.2%
Deutsche Bank 5,000 - 12.5%
UBS 5,000 - 12.5%
* from Friday's close of 4,444.7
Note that all of these companies are predicting that the Footsie will rise next year, but that stands to reason. After all, they're all in the business of making money from equity investment, so it's inevitable that they're going to talk up the market every year, because it's in their interest to do so!
However, I take all these predictions with a hefty pinch of salt, for these reasons:
Over a twenty-year period, eight of ten managers of active funds fail to beat the FTSE All-Share index. If they can't even beat this major benchmark over the long term, why would you trust their predictions over a single year?
The Financial Services Authority came up with the following wealth warning for investors: "past performance is not a guide to the future". This seems particularly true when applied to the stock market as a whole: one year's performance bears little resemblance to returns in previous or future years.
These predictions tend to be very closely clustered. In other words, analysts are terrified of going out on a limb by publishing figures that are meaningfully different from those released by their peers. After all, any resulting bad publicity could hit their employer's credibility and business performance.
I see a lot of coverage in the business pages about these predictions, but precious little comment on how these commentators performed over the previous year. A friend of mine produced one of the above figures - and I can tell you that his past record isn't that impressive (but he's still mightily well paid)!
These analysts are undoubtedly brainier than I am, but they are unwilling - perhaps even unable - to admit the truth: they haven't a clue what will happen to the market at any point in the future: tomorrow, next week, next month or next year. They don't even know if the market will go up or down over any given period.
Long-term investors shouldn't give a hoot about where the Footsie will be in twelve months' time. What matters to us is the continuation of the market's historical growth trend. Despite the recent three-year bear market, that record is still very much intact: with dividends reinvested, the UK stock market grew by almost 12.5% a year on average between 1972 and 2002
By Cliff D'Arcy
One of my favourite quotes from the financial world - often used to describe the behaviour of economists, stock-market pundits and so on - is:
"Forecasting is like trying to drive a car blindfolded, following directions given by a person looking out of the back window."
It seems particularly apt at this time of year, when analysts at the big investment banks and brokers present their predictions for the year-end level of the FTSE 100 (^FTSE - news) in twelve months' time.
Here are six of the latest offerings, ranked from least to most optimistic:
Company FTSE prediction Percentage rise*
Morgan Stanley 4,500 - 1.2%
HSBC 4,700 - 5.7%
Goldman Sachs 4,800 - 8.0%
Lehman Brothers 4,900 - 10.2%
Deutsche Bank 5,000 - 12.5%
UBS 5,000 - 12.5%
* from Friday's close of 4,444.7
Note that all of these companies are predicting that the Footsie will rise next year, but that stands to reason. After all, they're all in the business of making money from equity investment, so it's inevitable that they're going to talk up the market every year, because it's in their interest to do so!
However, I take all these predictions with a hefty pinch of salt, for these reasons:
Over a twenty-year period, eight of ten managers of active funds fail to beat the FTSE All-Share index. If they can't even beat this major benchmark over the long term, why would you trust their predictions over a single year?
The Financial Services Authority came up with the following wealth warning for investors: "past performance is not a guide to the future". This seems particularly true when applied to the stock market as a whole: one year's performance bears little resemblance to returns in previous or future years.
These predictions tend to be very closely clustered. In other words, analysts are terrified of going out on a limb by publishing figures that are meaningfully different from those released by their peers. After all, any resulting bad publicity could hit their employer's credibility and business performance.
I see a lot of coverage in the business pages about these predictions, but precious little comment on how these commentators performed over the previous year. A friend of mine produced one of the above figures - and I can tell you that his past record isn't that impressive (but he's still mightily well paid)!
These analysts are undoubtedly brainier than I am, but they are unwilling - perhaps even unable - to admit the truth: they haven't a clue what will happen to the market at any point in the future: tomorrow, next week, next month or next year. They don't even know if the market will go up or down over any given period.
Long-term investors shouldn't give a hoot about where the Footsie will be in twelve months' time. What matters to us is the continuation of the market's historical growth trend. Despite the recent three-year bear market, that record is still very much intact: with dividends reinvested, the UK stock market grew by almost 12.5% a year on average between 1972 and 2002