In the spring of 2008, the New York Times published an article with the headline: An Oracle of Oil Predicts $200-a-Barrel Crude.
The oracle in question was Goldman Sachs equity analyst Arjun Murti who was predicting a “super spike” in the price of oil, continuing a run that had brought it to $130 a barrel at the time the article ran in May 2008. (All figures in U.S. dollars.)
“The grim calculus of Mr. Murti’s prediction…is enough to give anyone pause: In an America of $200 oil, gasoline could cost more than $6 a gallon,” the article says.
As the piece noted, Murti was far from alone in forecasting a further surge in oil prices. In Canada, former CIBC World Markets chief economist Jeff Rubin also called for $200 a barrel oil and even wrote a book describing all the implications for the economy.
Sadly for these analysts, the stage had already been set for the collapse of oil prices. The 2008-09 financial crisis and accompanying recession sent prices to below $40 a barrel. But it wasn’t long before prices were climbing again and the oil bulls were back at it, only to be disappointed when the fracking revolution helped flood the world with crude.
It’s been a quite a rollercoaster. Now, think what would have happened to your investment portfolio had you actually taken these headlines seriously and loaded up on the stocks of energy producers and other companies that benefit from high oil prices.
Every day you can find predictions from stock analysts, professional investors and economists about what’s going to happen in the markets.
These forecasts are often persuasively argued, pointing to “fundamentals,” market history and various data points. And they are often wrong.
In fact, the evidence is that the experts are no better at seeing into the future than you and me. Their predictions have been proven wholly unreliable as demonstrated in another Times article. It reports on research into the forecasts made by Wall Street strategists between 2000 and the end of 2019.
“The gap between the median forecast and the market return was 4.31 percentage points, an error of almost 45 percent,” the article says. “The median forecast was that stocks would rise every year for the last 20 years, but they fell in six years. The consensus was wrong about the basic direction of the market 30 percent of the time.”
Actually, market predictions are worse than useless because they generate media commentary that can throw your investment plan off track.
To better understand the danger to your financial health, you only have to think back to the dire headlines at the time the market was falling in February and March in response to the pandemic crisis. For example, a headline in the Globe and Mail on March 12 warned A significant bear market is just starting.
We know in hindsight the market would bottom just 11 days later. On that day, a powerful rally began that saw stocks rise 38% in Canada and 40% in the U.S to the end of June. By the end of August, client portfolios we manage had returned to close to their opening value at the beginning of the year. If the negative headlines had scared you out of the market in March, you would have missed out on that rally.
Of course, we might be headed for another market downturn if there’s a serious second wave of the pandemic or some other negative event in the weeks ahead. And that’s the point—we just don’t know what’s going to happen and neither does anyone else.
However, we do know that $1,000 invested in world equity markets in 1985 would have turned into $28,000 by the end of 2019. That’s why it’s so important to tune out the day-to-day noise and focus on long-term returns.
It may not be exciting, but the only investing news that matters is that patiently holding a broadly diversified portfolio that reflects your tolerance for risk through good times and bad is the best way to build wealth.