As another years draws to a close it’s natural to start thinking about next year, and for investors everywhere that often means reading and making stock market predictions.
Sadly, stock market predictions are almost always a complete waste of time. They have virtually no value other than as entertainment, or as a way to make us at least feel as if we’re preparing for the future.
However, all is not lost. In some years it is possible to make sensible and accurate stock market predictions, but will 2013 be one of those years?
The calculator versus the crystal ball
Many economists, commentators and other market pundits like to predict the stock market in the same way that most people make predictions about the world in general – They just make it up.
That’s entirely reasonable because in many situations it’s not obvious that there’s a better alternative than simple rules of thumb like, “there’s a tiger over there so I’m going to run the other way”. The person running from the tiger hasn’t used any complex probability theory to work out the best course of action, it just seems reasonable that avoiding a tiger is a good idea.
It’s an approach that has served us quite well for many thousands – if not millions – of years and so it’s a well tried approach.
Unfortunately, it isn’t very good at predicting the future in detail.
Saying “there’s a tiger so I’m going to run the other way” (and then doing it) is a sensible thing to do, but to start making complex predictions about the tiger’s future position, direction, mental state and who knows what else in order to calculate some probability that you’ll be able to walk past safely in ten minutes time, is both a waste of time and very dangerous.
The additional precision will most likely add nothing other than the illusion of knowledge.
In that respect the stock market and that tiger are very similar.
We know that at the end of 2013 the FTSE 100 will be at some level, and we know that since it’s currently around 5,500 to 6,000 that it won’t be at 30,000 and it won’t be at 1,000.
But the more we try to narrow down the range and become more precise, like trying to predict the exact future position and direction of the tiger, the less likely…
