Accretive On: Forecasting

June 26, 2019

“It's tough to make predictions, especially about the future.” ― Yogi Berra

The Wall Street Journal recently ran a story describing the treasury bond rally that few saw coming.  The most striking thing to us about the article were not the bond managers who bought the long-term treasury (check back for more on long treasuries in a later blog post) but the practice of forecasting and the dismal predictions from practitioners of the dismal science.  

“We have two classes of forecasters: Those who don’t know — and those who don’t know they don’t know.” — economist John Kenneth Galbraith

Going into 2019 the average forecast from economists surveyed by the Wall Street Journal was for the 10-year treasury to end the year yielding more than 3.35%, and one can see from the chart above that most of them expected it to rise.  

These forecasters were presumably armed with all kinds of economic data as well as lengthy resumes that detail their post-graduate schooling at very expensive, distinguished universities and their lengthy, on the job experience.  So how did so many experienced, smart, well informed, and well-educated forecasters get it so wrong?  

We think there are two main reasons: they didn’t know and there is comfort in the consensus.  Humans are herd like creatures and in public prediction games there is career risk in being out of consensus and wrong.  If you are going to fail, fail conventionally.  It is also possible that the forecaster’s background and experience worked against them.  When making predictions about uncertain events, research shows that more data and education only serve to increase confidence but not accuracy.  These dismal scientists the Wall Street Journal surveyed were wrong, but at least they were confidently wrong together.  

“Forecasts usually tell us more of the forecaster than of the future.” — Warren Buffett

Mr. Buffett is the great teacher in investing and his quote here is quite instructive.  Often when one is forecasting, the forecaster projects their desires or worldview onto the forecast.  As an example, a forecaster might think to themselves (subconsciously) “I think interest rates are too low and they should be higher because they have been higher in the past.”  Indeed, this was the consensus forecast in late 2018.  

The goal should be to make a prediction that reflects the way things are, not how we hope or wish for them to be.  Many economists, including those at the Fed, hope and wish for rates to be higher but that may not reflect the state of the world as it is today.  

On being “wrong” and how this influences our thinking

This is all well and good, but we are picking on (perhaps unfairly) some poor economists who collectively made a bad call. What does it mean for what we do in portfolios?  It’s simple; at Accretive we try not to make too many forecasts.  Instead, we seek to build a solid framework for making investment decisions on how we allocate capital. We then seek to continually improve the framework.  In part, we seek to see and understand the investing world for how things are and to build portfolios that contemplate various good and bad scenarios.  We much prefer forecasts with a range of outcomes rather than those centered around one number.  When we do make some kind of prediction, we recognize that we may be wrong and try to be cognizant of the risks that could make something play out differently than we initially thought.  We also try to hedge our ignorance by avoiding all or nothing bets.  

Investing has a high error rate and mistakes will be made, perfection is unattainable.  Humility is important, and if we are wrong about something, we try to admit it quickly and not prolong the problem by remaining wrong.  We do so by being open to changing our mind.  We do pre-mortems to memorialize our thinking in the moment, which limits our ability to change a narrative to fit the facts. We then conduct post-mortems which allow us to see where our thinking could be improved. In our view, everything creates an opportunity to learn and improve our process, and that is especially true when we are wrong about something.

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Accretive Wealth Partners, LLC (“Accretive Wealth”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Accretive Wealth and its representatives are properly licensed or exempt from licensure.This commentary is a general communication and the information contained herein is being provided for educational and informational purposes only. This commentary does not constitute investment advice and it should not be relied on as such. It is not intended to be and should not be considered a solicitation to buy or an offer to sell a security or a recommendation for any specific investment product, strategy, security or any other purpose. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. Any examples used are generic, hypothetical and for illustration purposes only. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor’s own situation.Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions that are solely the opinion of Accretive Wealth and should not be construed as indicative of actual events that will occur.Any performance presented herein is for illustrative purposes only. Past performance shown is not indicative of future results, which could differ substantially.  Current data may differ from data quoted.The views and strategies described herein may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities or gain exposure to such asset classes and financial markets.Information contained herein that is not proprietary to Accretive Wealth has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Accretive Wealth.For additional information, please visit our website at