Thursday, June 26, 2008

The Danger of Short-Term Predictions

A couple of weeks ago I wrote a post entitled "So Many Words, So Little To Say" expressing some frustration with an article written by Tony Crescenzi of TheStreet.Com. In his article, Tony started off by stating, "There is a scenario that has a low but reasonable chance of occurring next week that could result in a very large rebound in share prices and risk assets next week and the week after, say 500 points or so in the Dow." I took issue with that and a few other comments that he made.

So, it's been a couple of weeks now. Let's see how Tony's call panned out. Tony wrote his article in the afternoon on June 10th. The close that day for the DJIA was 12,289. Since he said the rebound could come within two weeks, let's check in two weeks later on June 24th. The close that day for the DJIA was 11,807. Ooops. That's actually pretty amazing since it is a 482 point DECLINE! So net-net, Tony was only off by 982 points! Now that is impressive. That would be hard to do even if you were trying.

As I wrote in my first critique of Tony's article:

I know that it isn't easy writing in a public forum and opening yourself up to criticism, but idle speculation about possible big moves in the market that might or might not happen over a ridiculously short time period if certain other things do or don't occur really doesn't add a lot of value. This type of article could just as easily have been written about the possibility of a 500 point drop in the market if the things Tony discusses don't come to fruition.
Looks like Tony should have written about the possibility of that 500 point decline instead. What are the lessons we can take from this?
  • The majority of the investment opinion articles out there are basically useless and do more to confuse people than enlighten them. Of course, none of us think our own articles are garbage!
  • Nobody knows where the market is going in the very short-term. If they did, they ought to be placing huge bets in the futures market and unblinkingly staring at their quote monitors -- not writing articles about it for Cramer.
  • Don't be fooled by someone's credentials. Some of the worst investors that I know have terrific credentials.
  • Be careful what you write. Someone might be reading it (my wife/co-editor reminds me of this with each of my posts).
Finally, as I wrote in the earlier post:
Although calling for a 500 point move isn't terribly bold in the current environment, Tony will get a ton of credit (and perhaps press) if it happens. If it doesn't happen, who will remember?
Well, I will.

The author is short sensationalism, silly short-term predictions, and poor short-term memories.