Before you look to professional analysts and other "experts", read this:
"Early in the year 2001 twenty-two "expert" Wall Street analysts from Louis Ruykeyser's "Wall Street Week" gave their estimates as to where the Dow would be at the close of the year. The estimates ranged from 11,400 to 12,300. But the actual Dow close was 10,021. Not one of the 22 panelists guessed that the Dow would close under 11,000.
"Again, early this year the same twenty-two top analysts gave their estimates as to where the Dow would close in 2002. The estimates ranged from 10,750 to 12,100. As of today, the Dow is at 8,460. Not one of the 22 experts saw the Dow closing below 10,000.
"How can this be? My answer is that none of these analysts is able to recognize change. Although we are in a primary bear market, evidently NONE of these experts understands what this means. Either that or they are so inculcated with the optimism of the last 25 years that they are not able to envision an extended, disastrous bear market."
Then comes Business Week. We are told that BW "polled some of the smartest players on Wall Street." They polled 67 analysts. Only 3 see the Dow going down. A different group of three see the S&P going down and only 2 see the NASDAQ going down. Some of the predictions are interesting. Bernie Schaeffer, for instance, sees the Dow slipping to 6000 by mid-year to rise back to 8500, roughly where we are today. Not a bad guess. I could see that happening. But he also forecasts a rise in the NASDAQ by over 50% to 2200!!! I suppose this will be led by Cisco and Sun? The P/E ratio is going back to 60? What am I missing? (I wonder at what price Bernie would sell me a call at 2200?)
Over 80% of "the smartest players on Wall Street" predict at least a 10% gain for Dow, and the average prediction for the NASDAQ is 20% (or so) rise by this time next year. Should we listen? Should we shut our eyes and buy Vanguard 500 and Janus 20?
Before leaping in, we might want to see how this group did last year. With a little effort, I found the 2002 predictions of 54 of the best and brightest in the last issue of Business Week in 2001. The results suggest we should look a little deeper before plunging back into the market based upon their recommendations.
Of the 54, only four were within 5% of the where the Dow is today. (Schaeffer to his credit was one of them.) Over half thought the Dow was going over 11,000 and a few saw 13,000!!! None of the 54 saw a NASDAQ dropping below 1500 (it is at 1367 this minute), and the average prediction was 2236, or almost 900 points and a 40% difference from where we are today. None saw the S&P below 900.
How could this be? How can the "smartest players on Wall Street" be (1) so wrong and, (2) so consistently wrong as a group? A reasonable person would assume their should be some more randomness - a balance -- in the predictions.
These "smartest players" did not change their views in mid-year. They remain bullish. Yet the stock market tanked. If everyone is so bullish, then who sold? What mass hallucination made these people into raving bulls?
A partial answer is in the make-up of the group. As you look at the firms for which they work, there is a pattern: they are mostly "sell-side" firms. They are in the business of selling stocks or investments to the public. Business Week and Wall Street Week don't go outside this rather self-interested world.
If they had asked Russell, for instance, who has been making rather good forecasts for 44 years, he would have said "down." You don't see a lot of newsletter writers in these groups. I know a number of hedge fund managers who were (and are) quite bearish. You hardly ever see a hedge fund manager in these groups.
We once asked Arthur Bell, my CPA and friend, about where to get a legal opinion on a certain matter. He asked us whether we wanted a positive or a negative opinion. It seems in a lot of fields the answer you get depends upon whom you ask. These polls essentially ask people who are in the business of selling stocks what they think their business will look like next year.
If you are forecasting a down or flat year, there is not much reason to buy if the only way you can profit is for the market to go up. Bearish predictions do not help sales. Do I think these analysts consciously alter their predictions trying to lure the unsuspecting investor? No, I don't. But I do think they look for reasons the market will go up and ignore reasons which suggest it will go down."