TV appearance exposes inability to predict the stock market

One of the unexpected difficulties of being in the investment business is answering the most common question from clients, friends and family: “What is the market going to do this year?”

The answer to the question is an easy one — because I have no idea what the market is going to do this year — but that answer leaves the questioner unfulfilled and sometimes unintentionally misled.

There is a seductive temptation to pretend to have some special discernment about short-term stock market moves. But if anyone pretends to know the answer they are lying — either to you, themselves or both.

Warren Buffett, the closest thing Wall Street has to royalty, says that over time the stock market will increase. “But in terms of what’s going to happen in a day or a week or a month or a year even, I’ve never felt that I knew it and I’ve never felt that it was important.”

Assume for a minute that Buffett is simply being coy and humble; maybe he does have an opinion about where the stock market is headed this year or next year, but he either doesn’t want to tell us or he doesn’t want to encourage others to spend time forecasting short-term stock price moves. If you monitor Buffett’s stock transactions on a quarter-to-quarter basis, it is obvious that if he has an opinion about the short-term direction of the market, it doesn’t factor into his general commitment to stocks.

Savita Subramanian is the head of U.S. equity strategy at Bank of America Merrill Lynch. On a June 5 appearance on CNBC, she warned against trusting the increase in stock prices over the previous week. “The market will get worse before it gets better.”

Six days later, after the Dow Jones Industrial Average had increased 700 points, Subramanian returned to CNBC, this time with a positive short-term outlook, explaining “when the facts change, I change.”

The only fact that changed in a week was that stock prices were higher. That’s it. That is, this highly educated, articulate, telegenic spokesperson with an impressive title determined that stocks were more attractive at higher prices than lower ones.

Maybe she has a special Columbia University MBA crystal ball, but try that logic the next time you buy a car and watch the salesman snicker. “I’m not going to pay $30,000 for that truck, but if you raise the price to $31,000 I will.”

Economist John Kenneth Galbraith once noted there are two classes of forecasters: those who don’t know and those who don’t know that they don’t know. I’m guessing that Buffett is in the former group, Subramanian in the latter.

David Moon, founder and president of Moon Capital Management, may be reached at david@mooncap.com.