Why Wall Street Strategists Always Seem Bullish

Let us divide those writing about forecasts into three camps:

  1. Those who make specific forecasts, sometimes required as part of their job;
  2. Those who criticize, but do not forecast;
  3. Those who make dramatic, non-consensus forecasts to get attention.

I plan a few more posts on this theme, but today I want to consider group 2. If you are seeking attention, it is easy to write a popular article about forecasting. Start with the viewpoint that the experts are dumb and that the average investor can do better. People love to be smarter than experts. Surveys show that 90% of all people are above average in intelligence! Well, maybe not 90%, but far more than half. They are very receptive to this approach.

Taking this easy target, the NYT cites a source claiming some great credentials. His report got a million page views and even more publicity in the sequel. I see plenty of bias and errors in his work, but let me start with the most colorful claim:

Now imagine having a coin calibrated to show “positive” 2/3 of the time, and “negative” 1/3 of the time. Flipping this coin would therefore outperform a Wall Street strategist!

This is an oft-cited concept. If the market declines 1/3 of the time (actual performance is a bit better, but we’ll go with the author’s numbers) and no Wall Street strategist forecasts lower stocks, supposedly that is proof that the experts are too bullish.

The author has quite obviously never had to forecast anything, and his math is seriously flawed. Suppose you merely forecast an up market. You will be correct 2/3 of the time. He uses his magical coin. 2/3 of the time it forecasts “up” and it is correct on 2/3 of those occasions. 4/9 in the win column. The coin forecasts “down” on 1/3 of the years, and it is correct 1/3 of the time. That is another 1/9 in the win column. So less than 56% right instead of 2/3.

The author also produces this mystery chart:

What is the wavy pink line? The wavy blue line is (apparently) a consensus average. The pink diamonds are an actual result. So, what is the pink line? A good chart has an explanatory legend, but this is a mystery.

If – instead of the mystery pink wavy line – you compare the blue line to the actual, it is directionally accurate in eleven cases, slightly wrong on four, and more seriously wrong on four others. The focus on the two lines distorts the results. There are other issues, including the time frame for analysis, but I am sticking to points that should be obvious to the average reader.

Everyone makes mistakes, but when you are calling out a lot of experts and possibly misleading investors, you bear a special responsibility to check your work. In the academic world of peer review, this article would not have been published as written.

Turning to the New York Times, readers expect a very high standard of reporting. The article does seek a little balance by looking for an accurate forecast, that of Seth J. Masters 2012 forecast of Dow 20K. It was good reasoning, like my own analysis two years earlier. Perhaps the author might have used (in George W’s words) “The Google” to search for Dow 20K.

The answer to the title question? Analysts are bullish because the long-term market trend is higher. In any given year, markets are likely to rise. If someone goes against the long-term trend, there had better be a compelling reason.

More to come on experts and predictions. My basic theme? A well-done forecast identifies the possible scenarios, specifies key variables, shows the range of errors, and focuses thinking for both the analyst and the reader.

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  • wkevinw December 21, 2016  

    No, many or most do not expect a high standard of reporting from the NY Times. They are a prime example of a failing business model which is in a vicious cycle prompting them to show lower standards all the time. Remember Jayson Blair? or how about this classic?

    • oldprof December 21, 2016  

      wkevinw — I certainly hope your issue was not the most important thing you saw in this post! I hope everyone gets the main theme.

      As to the NYT, I am not doing a review of any particular publication. If the story had been run in the Washington Post, or Fox news or the Trib or wherever, I would have said the same thing. The large media sources have big followings. You and I might not agree, but their readers, virtually by definition, have enough confidence to pay for the paper.


  • Phil December 21, 2016  

    “We have long felt that the only value of stock forecasters is to make fortune-tellers look good.” (Warren Buffet)

    • oldprof December 21, 2016  

      Phil — Having followed Mr. B for many years and having read several books about him, I am familiar with most of the quotes. There is plenty of wisdom, but we should still think for ourselves. When he analyzes a company — its management, earnings, balance sheet, etc. — and decides to invest, what would you call that?

      Forecasting comes in many forms.


  • Phil December 21, 2016  

    Jeff: I think he is referencing market forecast as opposed to individual stocks. He is the quintessential value investor but that can have a variety of meanings and implications. What I have learned from him is to evaluate companies as if I was buying the entire business. This , of course entails analysis of not only stock price but financial metrics, competition, management, markets, etc. So, if he buys AAPL at 117 today but analysis says it is worth 150, then, I suppose the future price/value is a forecast of sorts. I monitor overall market forecasts as a measure of sentiment but take it with a good dose of salt. There always seems to be good value stocks if one digs deep enough.

  • wkevinw December 21, 2016  

    The “oracle-based” decision making that goes into my investment decisions is already very small (the main theme of the article + some chart tips- note that I review graphical data for a living, so no surprise that charts can be made to be misleading.)

    Real, professional journalism has basically been dead for a decade or more. The NYT is a failing business, or at minimum I would use the more diplomatic term that it is disrupted.