“Those who have knowledge, don’t predict. Those who predict, don’t have knowledge” Lao Tsu
Wall Street is full of pundits who forecast the market and consistently get it wrong. Yet our capacity for forgiveness seems to know no bounds…they keep getting it wrong and we keep listening to the same talking heads. Investors get thrown under a bus while Goldman Sachs continues making money. Madness? No…Just Wall Street.
These forecasts are wrong as often as they are right. But occasionally a forecast gets it very, very wrong. We need to thank these guys because they remind us how stupid Wall Street can be and how important it is to remain skeptical.
On Oct 15, 1929, Irving Fisher, economics professor at Yale told us that “Stocks have reached what looks like a permanently high plateau” The stock market crash of 1929 began a week later and the Dow Jones lost 70% of its value within the next 2 years.
Recent history is littered with many more examples
- Goldman Sachs in May 2008 forecast that oil would hit $200 per barrel in their ubiquitous ‘Peak Oil’ call. They told us “it is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand” By Feb 2009 the credit crunch had taken its toll and the oil price duly fell below $40. Goldman Sachs turned a bit quieter after that and they abandoned their call to go long in 2012. Few analysts have spoken of Peak Oil since then.
- In June 2007, Goldman Sachs upgraded their price target on Lehman Brothers from $87 to $91 and raised their EPS forecast. They confidently cited a “stronger investment banking and equities trading environment” . Goldmans maintained their buy rating until September 11, 2008 just 4 days before the bankruptcy, when they abruptly moved their price target to $7. In a gross understatement they noted “commentary from some of the ratings agencies and the movement in the company’s credit default swaps suggest risk to the firm’s ratings, which would increase funding costs”. Er….you think?
- In January 2012, following the IPO of Zynga 6 out of the 7 large Wall Street Firms had a buy rating on the stock. Goldman Sachs (see a pattern here…?) initiated with a Buy rating and an aggressive $13 price target on January 25. They predicted “resurgence in daily active user growth as the company launches new games, expands into new platforms” and they forecast revenues to rise by 40% over 2 years. Just 6 months later GS downgraded their rating to Neutral and reduced their price target from $13 to $4 as growth fell far short of expectations. Today the share price still languishes below $5, far short of the $10 IPO price. Of the 7 Wall St firms, none of them have kept their original buy rating on the stock.
“I always avoid prophesying beforehand because it is much better to prophesy after the event has already taken place” Winston Churchill
Forecasts are the stock-in-trade of Wall Street. Equity markets, commodities, earnings estimates, subscriber numbers. You name it, you can find a dozen different forecasts for it. But I’ve rarely found that these forecasts give me any insights that make me a better investor and in some cases they can be downright dangerous. My advice is to steer clear of Wall Street and follow instead Buffett’s less exact but far more useful mantra “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now”