I don’t believe in the Power of Prediction. No one has the ability to pick winners on a consistent basis. If they could they wouldn’t still be in business in New Zealand. They would be on the beach in the Bahamas and an appointment would cost a lot of money!    

It seems to me that the investor and the investment industry still interact like it is possible to pick winners. It’s just that the crystal ball is disguised by the corporate gloss of employing smart people or having research or having a smart process or some combination of all three.

Let’s be clear about this - if you knew ahead of time what investors should buy and sell, then you would make more money out of following your own advice rather then selling your advice. And yet everyday, “wise heads” are consulted by media and investors as to what people should do in the current economic conditions. If they really knew the answer, they would be too busy for a "sound bite".      

The reality is that when scientists review the results of the predictors they find that picking and choosing has produced no better results then just investing without choice and that in many cases thepicking and choosing  results are worse. 

The usual stories that get media attention are the gorillas that do better then the sharebrokers or the housewife versus the experts. But there are lots of scientific studies over decades that have been done in various countries using different groups e.g. Financial advisors, fund managers and sharebrokers. These are studies carried out with highest scientific rigour, vetted by peer review and hotly debated and refined. The conclusion is still the same, the longer the time period the smaller the number of successful predictors. Even if somewhere there is one successful predictor you would have to find them on day one before they had success and give them all your money immediately.

Two questions spring from this: 

Why is this underperformance not more noticeable to the public?

If prediction doesn’t work, then what is the alternative?   

Read more to discover the answers …