Sam Sivarajan is a wealth management consultant and the author of two bestselling books on investing and decision-making. He can be found at www.samsivarajan.com
One of the most watched sports events of the year is March Madness – the NCAA, or collegiate, basketball tournament in the United States. Besides watching the athletic displays on court, many fans take part in pools to predict the winner. A March Madness “bracket” consists of 63 games, and a perfect bracket requires predicting the winner of all 63 games. The odds of doing so are extremely remote – one in 9.2 quintillion (a quintillion is a billion billions). That’s so remote that Warren Buffett has for years offered $1-billion to any employee who correctly predicts the perfect bracket. So far, he has not had to pay out.
You would think that forecasts from basketball fans would be much less accurate than those coming from experts in other more serious fields. But that may not be so.
In his book, Superforecasting, Philip Tetlock talks about a landmark study from 2005 that showed even expert predictions are only slightly better than chance (ie 50 per cent). He lays out his research efforts from the Good Judgement Project, which tracked tens of thousands of ordinary people who got involved in predicting global events. Many in this group are “superforecasters,” having beaten even the collective judgment of professional intelligence analysts who have access to sophisticated tools and classified information.
The book provides lessons on how forecasts can be improved, such as sourcing evidence from a variety of perspectives, working in teams with complementary skills and experiences, tracking errors and the lessons from those errors, and thinking probabilistically. The last is particularly important. It means thinking not in a deterministic manner (black-or-white, yes-or-no), but accepting there may be a range of outcomes with differing likelihoods of occurrence. Most events, like March Madness or stock market movements, are probabilistic, not deterministic.
Picking the winning bracket may be next to impossible, but picking the winner of the tournament is markedly easier. In the last 37 years, 34 times one of the top four seeds has won the tournament. Of course, there are anomalies, like this year. But picking one of the top four to win the tournament is a pretty bankable forecast. Similarly, we might not be able to forecast the exact temperature on July 15, 2025; but, based on seasonal patterns, meteorological data, personal experience, we can be highly confident that it will be hot and humid in much of Canada. Of course, Prof. Tetlock would say we should still take a probabilistic approach to predicting future weather and plan accordingly.
What are the lessons for investors? It is particularly difficult to predict market movements, or specific stock price movements, over the short term. This is the lesson that, unfortunately, many investors have learned over the past few years. Robinhood, the online financial services company that benefited from the pandemic-fuelled retail trading boom, reported a 40-per-cent decline year-over-year in trading activity in its October, 2022, results. As the stock market boom faltered and gave way to increased market unpredictability, day-trading activity decreased dramatically. And, of course, the markets have continued to be volatile. As to where the markets will be in a day, a week, or a month, it would be difficult for even the superforecasters to predict with certainty.
However, investors who are in it for the long term and choose to invest in a well-diversified portfolio needn’t worry too much. The S&P 500 (the index representing the 500 largest companies in the United States), for example, has returned an annualized 7.5 per cent over the last 20 years – far and above the 2.9 per cent earned by the average investor. This gap is driven largely by investors trying to forecast short-term movements in the market. Much like picking the top seeds in the NCAA can be a winning strategy, staying invested long term in a diversified portfolio, like an ETF tracking the S&P 500, can be a winning strategy: Over the past 42 years, despite average intrayear declines of 14 per cent, the S&P 500 finished the year in positive territory in 32 of those years.
After all, in the immortal words of the baseball icon and “philosopher” Yogi Berra: “It’s tough to make predictions, especially about the future.”