How Some Financial Pundits Make Predictions That Come True

Nostradamus was a french philosopher, apothecary, and self-proclaimed prophet from the sixteenth century.  In his life, he transcribed over six thousand prophecies. His poetic and mysterious writing style attracted the attention of many important people of his day, including Catherine de Médicis, wife of King Henry II of France. After his death in 1567, his followers continued to publish his work and he became increasingly more famous throughout the centuries.

The prophetic aphorisms of Nostradamus, recorded in his collection entitled The Prophecies, have been interpreted to predict many historical events including the Great Fire of London, the rise of both Napoleon and Adolf Hitler, and–more recently–the attacks on the World Trade Center on September 11, 2001. So, how did Nostradamus know all of these things were going to happen? Well, as you can probably guess, I don’t really think that he did…

As an investor in the modern marketplace, you will run into many a Nostradamus. If you pay close attention to the stock market analysts writing for many major magazines, newspapers, and journals, what you are really looking at is a collection of modern-day prophecies. All of the time, you will see financial pundits describing a market reality–and then subsequently explaining how a prediction that they made in the past foretold the current event. You might start to think that these pundits can really predict the future. But, not so fast! It turns out that, just like Nostradamus, they’ve got a few tricks up their sleeves.

First, do you remember how many prophecies I said Nostradamus made in his lifetime? Six thousand. Wall Street analysts employ the same strategy as Nostradamus: volume. If you make enough guesses about what is going to happen, some of those guesses–by sheer probability–are likely going to be true. Given six thousand darts to throw at a dartboard, even a blind man is likely to hit the bulls eye once or twice. Financial pundits are throwing darts into the future, in the form of forecasts. Eventually, one of those models is going to stick. Then, all the analyst has to do is throw out the forecasts that turned out to be wrong. Presto! The analyst just predicted the future.

The other trick Nostradamus and his followers had up their sleeves is that his prophecies were interpreted in hindsight. As philosopher Friedrich von Schlegel has famously said, “The historian is a prophet facing backwards.” When you’re interpreting the past, it’s easy to read the present into it. Psychologists call this, “hindsight bias.” Wall Street Analysts do the same things. When events happen in the marketplace, they dig into the archives and reinterpret the data to fit the current event. They don’t predict the future; they amend the past.

Like the followers of Nostradamus, it can be easy as modern-day investors to buy into the hype and actually believe the financial pundits who say they know where the market is going. Nobody knows where the market is going. For investors, the belief that there is a shortcut to massive returns can be catastrophic. Great investors prefer to focus on discipline rather than fortune-telling. If you need help learning how to become a more disciplined investor, please feel free to reach out to us. We’re always open to a free consultation.