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Q&A: What Do You Think About Economic Forecasts?

Things to consider before changing your course.

Question: A website makes a strong case for a looming stock market crisis, saying there are three key indicators screaming SELL. It states that a 50% market collapse is already at the door. It uses 20 charts to make the case and has a track record of calling every major economic shift over the past 30 years. What do you think of the person behind this website and his prediction?

Ric: First of all, how do you know this site has correctly called every major economic shift over the past 30 years? Because it said so?

It’s easy to make claims, but much harder to prove them.

There’s an old joke in the brokerage industry about the broker who called 100 people and said he recommended that they sell IBM stock, and then called 100 people and told them to buy IBM stock.

Later, after IBM rose or fell, he called the 100 to whom he gave the “right” prediction and told 50 of them to buy GM; the other 50 were told to sell GM.

After GM did its thing, he called the 50 who had gotten the right prediction and told 25 of them to buy American Airlines, and told the other 25 to sell AA.

Afterward, he called the 25 and said, “I’ve given you three perfect stock picks. If you don’t invest your money with me now, I’m never giving you another tip!”

Of the 200 people he started with, 25 of them thought he was a genius — at least for a while — until they became clients and discovered that he couldn’t repeat his “proven success.”

You can imagine that he might build a website listing all those great calls he made in the past as evidence of his brilliance. He could simply create materials and backdate them to give the appearance that he’s never been wrong.

Have you bothered to verify any of his claims? This strikes me as worth doing if you’re planning to invest your money based on his latest prediction. (Frankly, I know of no one who has gotten every major economic shift right over the past 30 years — and anyone who did manage to do that would be so wealthy that they wouldn’t need to try to hawk their wares to you.)

For every guy telling you that the market will crash, I can find 10 others saying that values will skyrocket. We ignore them all — and you should too.

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