, Harry Browne exposed the tricks that market forecasters (such as Jim Rogers) use to make people believe in their clairvoyant powers.
CHAPTER 3: Forecasts That Go Wrong
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GETTING OFF THE HOOK
You may wonder how advisors can continue in business while making forecasts that almost never come true.
The answer is that while few people keep track of the predictions, most people want to keep hearing them. It's as simple as that.
Even when an investor loses money acting on a forecast, he may wonder whether he used the forecast properly — especially when the forecaster claims that the outcome is another victory for his forecasting record. And having lost money on one forecast, the investor can feel an even greater need to find another one that will help recoup his loss.
Even if a prediction was clearly awful and you confront the forecaster with it, he doesn't have to apologize. Forecasting means never having to say you're wrong, since there are so many ways to slip off the hook.
We should look at a few of those ways, so that you'll understand the nature of the talent underlying most "uncanny" forecasting records.
DIDN'T YOU SEE IT?
When a forecast goes wrong, one way out is to say that the predicted event did occur, but that it's been concealed by other things.
Did your prediction of higher inflation by 1985 go wrong? Just say that the economy is permeated by intense inflationary pressure, but it's hidden by the exceptional fall in oil prices and the strong dollar in foreign exchange markets.
Where you the one whose cycle theory targeted 1986 for a stock-market crash? Tell them that the downside of the cycle arrived right on schedule — preventing the Dow Jones from reaching 3000 in 1986.
TIMING
When the deadline passes without the predicted event occuring, another out is to adjust the timing. And then adjust it agin, and again, and again.
On August 27, 1982, one famous investment advisor made it clear that inflation (then at 6.5%) was on the way up.
Then look for gradually rekindling inflaiton, a recovery from recession, and eventually 25% to 30% inflation within four years.
By the middle of 1983, the inflation rate had dropped by over half — to 2.4%. So, he said:
The Commodity Research Bureau Index has jumped 24% from it's September 1982 low, and is saying in no uncertain terms, price inflation is coming. It will take a while to work its way into the Consumer Price Index, but it is inevitable.
In January 1984, the latest inflation rate was a lethargic 3.2% — a letdown from the resugence he had anticipated. He said, " The reasons for it are simple," and explained that high interest rates and the severity of the last recession had caused the interlude before the next round of inflation to be longer than in previous monetary cycles. He said it so mater-of-factly that one couldn't help but wonder why he hadn't bothered to tell us this before we had bet our money on imminent inflation. But no maqtter:
This has had a dampening effect on inflation but has only postponed the inevitable...I don't expect much of anything on the inflation front until the second half of the year [1984]
By January 1985, the inflation rate had inched up to 4.0%. He said:
This year (probably in the first six months), we'll see higher inflation, higher metals, cheaper stocks, and an end to the interest rate decline.
As it turned out, 1985 brought level inflation, level metal prices, much higher stocks, and a continuation of the interest-rate decline. Otherwise, he was right on target.
Then came January 1986 and inflation was back down to 3.6%. He explained:
Last year, I said inflation would probably start up early in the year. I got the year wrong...because the Fed maintained a strong dollar and high real interest rates much longer than I thought they could, delaying inflation way beyond our expectations. But that's now history. That forecast for 1985 will happen in 1986, and people who bought inflation hedges and held on will have their judgement vindicated...
Right on schedule, our year-to-year inflation indicator has shown its first small upturn in a long time. I think it is significant, and rising inflation should be the biggest surprise of 1986
At the time he wrote that, the inflation rate was 3.6%. By the end of 1986, the rate had dropped to 1.3%. I guess inflation was "the biggest surprise of 1986" — to the advisor.
In January 1987 there was no forecast issue.
Interestingly, this man often suggests that his most important asset as an investment advisor is his understanding of where we are in the business cycle at any given time.
CREATIVE REDEFINITION
Another way to slip out of a prediction is to say that you meant something different from what some people seem to think you meant.
In the early 1980s, a number of advisors predicted a resurgence of inflation by 1983. When inflation hadn't returned by 1983 or 1984, or even by 1985 or 1986, some of them still insisted they'd been right — because the original, 19th-century, definition of "inflation" is an increase in the supply of money, which had in fact occured. However, their readers who had acted on the forecast may be wondering why, in that case, they had bought so much gold and real estate.
Those who have forecast deflation also know how to redefine words. One prominent investmetn advistor predicted over and over that there would be a full-scale deflation "in the early 1980s." What we got instead was disinflation — just as we'd had in the late 1950s, the late 1960s, and the mid-1970s. Undaunted, the forecaster said that we were going through a deflation, but that people who didn't want to admit he was right had renamed it disinflation. ("Deflation" means a fall in prices. "Disinflation — which is not a new world — means a slowing of the rate at which prices are rising).
The world's record for audacious redefinition may have been set in 1975. After having predicted an imminent deflationary collapse for several years, a prominent newsletter writer vindicated his prediction by describing the high prices he'd encountered on a recent trip — summing it all up, "If that isn't deflation in the value of money, I don't know what is."
This astounding escape has been an instpiration to investment advisors ever since. We know that, whatever happens, there's a way to come out smelling like a rose.
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FORECASTING & STRATEGY
Some investment advisors and mutual fund managers have compiled impressive, verifiable records — and not by luck alone. In most cases, however, this success isn't testimony to their forecasting powers.
Rather, success has been earned with methods that help the advisor recognize investment values, enter markets when the risk is low, cut losses when investments turn bad, and let profits grow when the market is kind. These methods don't involve forecasting: they are a part of good strategy.
Nevertheless, many of these successful advisors insist that their greatest virtue is an ability to forecast the future. Like most investors, they assume that success comes from forecasting. And like most advisors, they believe their customers expect them to be good at it.
FORECASTING THE FUTURE
Investing would be so simple and easy if a wizard could tell us what the future holds. So it's understandable that most people are reluctant to check a forecaster's record closely, and are so willing to give him the benefit of the doubt.
It's also understandable that you might refuse to accept what I say about forecasting — no matter how many examples of bad forecasting I trot out, or how many arguments against forecasting I assert.
And even if you do agree with me in priciple, tomorrow you may come across a forecaster who seems to be truly different. I wouldn't be surprised; it's his trade, his craft, to seem different.
You might choose to believe in him because he's discovered a reliable new indicator, or because he has a wonderful track record, or because he builds his forecast from assumptions you share. And you may wecome him because you're not sure how you could invest without a forecaster to guide you.
To know the future is a perennial hope. And there is no end to the promises that the hope will be fulfilled.
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