Are You Qualified to Make Stock Forecasts?

March 17, 2009

In the wake of Nouriel Roubini’s latest 6,000-word jeremiad on the subject of the fate of the stock market, Joe Wiesenthal writes:

Here’s the real question: What on earth are Roubini’s qualifications to make stock forecasts?
The dude’s an international economist.
I understand your desire to defend him against the mob, but can you justify him [giving] buy/sell advice as he did in his latest piece? Or giving quotes like, "equities will decline by 20%"
It’s hogwash.

Well, yes, stock forecasts are hogwash: nobody knows where stocks are going. But that’s precisely why it’s silly to single out Roubini for criticism on that front.

People make stock forecasts every day, normally because they have some kind of financial interest in doing so. (Roubini certainly does: he’s a highly-paid pundit, and there are many people who want to know where he thinks stocks are headed.)

The forecast part of any stock forecast is worthless: if you reduce a piece of research to its buy/hold/sell recommendation, you’re basically stripping it of all its added value. Insofar as stock forecasts are interesting or useful, it’s because of everything else they contain: the reasoning behind the forecast. And whatever you think about Nouriel, his pieces contain a very great deal of reasoning.

What’s more, Roubini’s forecasts do have the added benefit of having been right of late. He’s clearly on a roll here, and he’s going to continue to be right, until he’s wrong; what’s more, there’s no real reason to believe that his streak has come to an end. So if you believe that any stock-market forecasts have value, you might well be interested in Nouriel’s. If you don’t believe that any stock-market forecasts have value, then there’s really no point in picking on his in particular. But anybody — or nobody — is qualified to make stock forecasts. There’s no elite stock-forecasting club into which only a select few have been inducted.

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