I’ve been came across this nice article America’s ‘Hollywood economy‘ written by Paul B Farrell in Marketwatch about the inaccuracies of economic forecasting.[Link thru The Big Picture] He writes about how investors have a natural tendency to be bulls or bears and so perceive incoming information with that bias. Paul says that “all investors are trapped in their cocoon of illusions, where economic predictions and market forecasts have far more power than any created by Hollywood’s best illusionists … and they’re far more elusive until it’s too late“. He goes on to state that William Sherden’s findings summarized in “The Fortune Sellers: The Big Business of Buying and Selling Predictions are still relevant today. I’m quite surprised at how familiar some of those 10 main points Sherden arrives at are. In very simple layman words:

• Economic forecasts are not much better than guesswork
• Economists are rarely right about transition points in economic cycles
• Long term forecasts are particularly inaccurate
• Forecasters, ideologies used for forecasts are inconsistent across all aspects of economic forecasts
• Consensus forecasts do not improve accuracy
• Forecasters are affected too by their bullish/bearish bias
• More data/sophistication does not improve forecasts since the world economy is rapidly evolving
• Forecasting has actually deteriorated in recent decades

Paul concludes that it’s useless trying to time the markets based on macroeconomic forecasts and that one should just focus on attaining a well diversified portfolio that’ll work in any given scenario. Well I’ve given up getting all worked up about global macroeconomic cycles some time back. Finally figured out that most of the people who achieved above market returns in the long run focussed their attention primarily on company specific trends. A nice quote by Peter Drucker which is cited in the article sums up the futility of the current debate on the state of the US economy best.

“Anybody who tells you that he understands the American economy ought to be sent to teach modern dance.” – Peter Drucker