Last week, there was a lottery drawing for a Mega Millions jackpot worth $656 million. Some estimates indicate over 100 million Americans lined up to buy tickets. And now the results are out: we know that there were a grand total of 3 winning tickets. The oddsmakers put the chances of winning at 1 in 176 million, not very good odds. But still, a few folks won in spite of the odds, while millions literally lost.
Financial forecasters and prediction experts follow this same pattern. As the cartoon above indicates, as the number of forecasts increases, the odds increase that at least one person will be right. The question then becomes was the forecaster “skilled” or just “lucky”?
To answer that question, you need to look at the track record of the forecaster. Unfortunately, past track records don’t get a lot of media attention. Honestly, we don’t even track the long-term accuracy of weather forecasters. So why would we track the long-term prediction performance of financial forecasters?
The answer is, if we did, there wouldn’t be too many forecasters in business for very long. And that’s simply because the future is unpredictable. No one can predict the future with certainty over and over again. But we sure enjoy the dream of trying. Kind of like buying lottery tickets–a lot of dreaming goes on once a ticket is purchased. But the reality is, when the results are announced, very few of us will be winners.
Financial forecasters experience the same fate. Many predict; few if any are accurate. When they are, they make the headlines (briefly). But 5 or 10 years later, those prediction experts are no longer around, instead replaced by the next hot set of “gurus.”
For my money, debating and talking about future financial events is certainly more fun than buying a lottery ticket. But I think my odds of success are probably better with the lottery. The loss of money spent on a ticket is certainly less than the loss in my investment portfolio when I listen to some forecaster’s spin. Where would you rather take a chance?