Coin Flip Beats Listening to Wall Street Pros, Analysis Shows

Do you think the predictions of Wall Street experts are “full of bull”? A statistician says you are right. Learn why.

Better Investing

Investors may be better off making their own stock market predictions each year by flipping a coin instead of listening to professional forecasts.

That’s the conclusion of recent number-crunching by statistician Salil Mehta, a chartered financial analyst who previously worked on Wall Street and now teaches as an adjunct professor at Georgetown University.

Mehta analyzed the accuracy of annual stock market forecasts for 1998 through 2015 from firms such as Barclays, BlackRock, Morgan Stanley and Prudential.

For the analysis, he culled 186 public forecasts from media reports published by Barron’s and USA Today.

As Mehta summarizes his findings in his blog, Statistical Ideas:

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.

The specific findings of Mehta’s analysis of the past 18 years include that Wall Street analysts:

  • Typically predict an “up” year more than 95 percent of the time, but the stock market has been up only 73 percent of the time.
  • Forecast annual returns of 9 percent, but actual returns have been about 4.5 percent.

So what does this mean for the average investor? According to Mehta:

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 percent 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 [have] grown your portfolio at an average of 9 percent a year. That’s a long period of time to be so ill-advised.

He also notes that for 2016, all 10 market strategists predict a market rise of 8 percent. As of yesterday, the market was down nearly 10 percent for the year.

What’s your take on the value of Wall Street predictions? Sound off in our Forums. It’s the place where you can speak your mind, explore topics in-depth, and post questions and get answers.

Stacy Johnson

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