Coin Flipping Beats Wall Street Strategists January 26, 2016

By Jay H. Salamon

Economists have suggested for years that while stockbrokers and brokerage firms will occasionally outperform the market, those instances are pretty much a product of random chance. Over a longer period than one year, the recommendations of these “expert” advisors add no value to investors’ portfolios. Investors would likely receive the same results by throwing darts or flipping coins

Investors who are guided by the annual market forecasts of the big Wall Street firms probably would achieve better results by flipping a coin. That’s the conclusion of Professor Salil Mehta, a statistician, chartered financial analyst, and former Wall Street big shot who now teaches statistics at Georgetown University.

Professor Mehta crunched the numbers and has presented the results in his blog,Statistical Ideas. For an eighteen year period, 1998 through 2015, he found that while Wall Street analysts from firms such as Merrill Lynch, Morgan Stanley, and UBS predicted an up year more than 95% of the time, the stock market was up only 73% of the time. He also found that these analysts collectively projected annual returns of 9%, but actual returns were only about 4.5%. In his blog entry, Professor Mehta summarized:

In now what’s an annual rite for Wall Street, their market “strategists” come out to the major media outlets and celebrate what they deem to be a prophetic view of the market’s future.  Year after year though, what we see is a generally tight and optimistic view of the next year’s market level.  Of course the market doesn’t always go up by 9% or so every year (in the past two decades it has been roughly half of this!), which begs the question where is the value in these strategists’ forecasts?  Given that many on Wall Street have been dishing out their views to the media for nearly two decades (and includes multiple business cycles), we can now scrutinize more closely their forecasts and examine the quality of these firms individually (as opposed to only as a group for a single year).  What we see in this article is that in some random circumstances, a predicting firm may be just ok, but many of the times the firms’ prediction results over the past 18 years are generally slightly worse than if had you flipped a coin about your own fixed guess as to where markets are headed, over that entire time. 

Mehta concludes:

If they can’t be trusted to pick the stock market level better than a coin flipper, then how could they be trusted to pick out things just as random (e.g., short-term outlooks, sector rotation, long-term projections, etc.)  The market provides random noise in all of these, and it’s foolish to act as if one can generally see into the future.  For 18 years, the market has given you only a 4.5% annualized return, but instead if you bullishly trusted Wall Street strategists with your money over this protracted period, they would have you thinking you would be growing your portfolio at an average of 9% a year.  That’s a long period of time to be so ill-advised.

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