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"[A] severe depression like that of 1920-21 is outside the range of probability." On September 20, 1930, it wrote, "[R]ecovery will soon be evident," adding on November 15, 1930, that "[the] oudook is for the end of the dechne in business in the early part of 1931, and steady ... revival for the remainder of the year." In 1931, hard-pressed for funds because of the Depression, the Society was forced to discontinue publication.

Fast-forwarding a few decades, the managing director of the International Monetary Fund said in 1959, "In all likelihood world inflation is over." Prices have more than quintupled since then, a bigger rise than in the previous thousand years. In 1968, Business Week wrote, "With over 50 foreign cars already on sale here, the Japanese auto industry isnt likely to carve out a big share of the market for itself."

Economic forecasting has proven to be anything but an exact science. A survey of 32 major economic forecasters in December 1973 discovered that only one had projected any decline in economic activity in 1974, which saw the worst recession of the entire postwar period. What about the one man who proved correct in late 1973 and actually did see the recession coming? An article reported: "[Mr. X] stopped issuing stock market forecasts several years ago after being wide of the mark time after time."

Was this instance, striking as it is, simply the exception that proves the rule? Apparently not. Other evidence indicates that the forecasting record of the "dismal science" is dismal indeed. In 1947, a group of well-known forecasters predicted that U.S. economic activity would decline approximately 6%. The economy that year was one of the strongest on record, showing an increase of 11%. A survey of many dozens of economists and business analysts in late 1969, with business already in a downtum, disclosed that few believed a recession would occur in 1970. The Blue Chip Economic Indicators, a service based in Sedona, Arizona, collected the forecasts of GNP by the 52 most important economic research firms in the country, for which clients paid up to $50,000 annually. For the six years to the end of 1982, the average forecast was off by a remarkable 43 percent. More recent evidence indicates economic forecasting is still wide of die mark with regularity.

In 1995, the Bank Credit Analyst, a respected economic and interest rate advisory firm, analyzed the interest rate forecasts of die 50 largest economic forecasting firms. As Figure 4-1 shows, forecasters were consistently wrong in the 1988-1994 period, thereby missing the major bond market moves. In each case, as the dotted line on the chart indicates, they projected a continuation of the present trend: the bond market in actuality swung sharply higher and lower.



Figure 4-1

Blue Chip Economic Indicators

Forecast of Long Treasury Yields 1988-1995

Actual Yield Consensus Forecast of

1989

1990

1991

1992

1993

1994

1995

Source; "Get Ready for a Bond Market Rally," Forbes, January 2, 1995, p. 35. Reprinted by Permission of FORBES Magazine © Forbes Inc., 1995.

Unfortunately, the Federal Reserves own rating as an economic seer is questionable at best. In July 1990, with a recession already underway, Fed Chairman Alan Greenspan told Congress that "the likelihood of a near-term recession seems low." The Fed did not cut interest rates to bolster the economy until December of that year. In the recessions beginning in 1973 and 1980, the Fed actually raised interest rates as business began to fall, in the belief it had been allowing the economy to expand too quickly. And the Fed raised the discount rate just two months before the 1981-1982 recession began.

The Difficulties of Forecasting

Although we may chuckle at how far off the track experts can be, their task is anything but easy. Sometimes the statements are just plain silly, like that of the commissioner of the U.S. Office of Patents. But keep in mind that when we ask an expert for a forecast, were asking him or her to read the future. Screening tens of thousands of actors, actresses.



Predictable Expert Errors

Although most of us tossed aside the illusion of expert invincibility long ago, it is only in the past few decades that we have discovered that, under certain conditions, experts err predictably and often. Experts in fields as far apart as psychology, engineering, publishing, even soil sampling, all make the same kinds of mistakes. As we shall see, the conditions for such errors are as fertile in the stock market as anywhere.

The problem of expert failure can be traced to mans weakness as an information processor. Just how much information a person can handle effectively has come under intense scrutiny in recent years, with striking results. One is that the investors comprehension of vast storehouses of data about companies, industries, or the economy mandated by current methods may not always give him or her the extra "edge." In fact, ingesting large amounts of investment information can lead to worse rather than better decisions. Impossible? In the next chapter, youll see that analyst forecasting, the heart of security analysis, which selects stocks precisely by the methods we are questioning, misses the mark time and again. Well also see shortly that the favorite stocks and Indus-

singers, or other artists is a judgment call; the only advantage the casting director has over the rest of us is his experience in the business. For every brilliant success, thousands of hopefuls are destined to fail. Finding the few exceptional talents is difficult, if not impossible. This is also the reason why many revolutionary new technologies are not recognized immediately. In their embryonic stages they are not much better, and perhaps worse, than what is already out there.

The banker who counseled his client against investing in the Ford Motor Company was giving sage advice. The automobile was an unreliable and costly machine. Hundreds of manufacturers had already tried to introduce a car for the average man and failed. This included Henry Ford, who had already gone bankrupt twice, with The Detroit Automobile Company in 1900 and The Henry Ford Company in 1901. Viewed with the luxury of hindsight, many of the economic and financial forecasts look ridiculous, but the outcomes were far more difficult to project at the time. The information processing necessary to making forecasts in complicated fields such as economics, investments, politics, or the military arts is enormous, often involving overwhelming amounts of data.

Let us look at just how good people are at digging through mounds of data to come up with the right answer.



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