Three economists went target shooting. The first missed by a metre to the right. The second missed by a metre to the left.
The third exclaimed "we got it!".
So goes an old joke told among economists themselves, according to AMP Ltd (ASX: AMP) chief economist Dr Shane Oliver.
The trouble with a year like 2022 is that ASX shares have been driven up and down by external economic concerns, such as inflation, interest rates, and oil prices.
Even though stocks represent ownership of companies, business performance seems to have taken a backseat to "macro" issues for impact on share prices.
If the market thinks the world is headed for a recession, ASX shares have plunged on those fears. If investors think interest rates might stop rising, stock prices have rallied on that hope.
But the point of the above joke is that economists know nothing… at least about the future, anyway.
Throw out the economic forecasts
Oliver, who is one of the most prominent economists in the country, therefore urges investors to ignore economic forecasts.
"In the quest to be right, the danger is that clinging to a forecast will end up losing money," he said in a memo to AMP clients.
"As [prominent investment researcher] Ned Davis has pointed out, for investors the key is to make money, not to be right with some forecast."
The trouble is, forecasters are human.
"Forecasters, like everyone, suffer from psychological biases: the tendency to assume the current state of the world will continue; the tendency to look mostly for confirming evidence; the tendency to only slowly adjust forecasts to new information; and excessive confidence in their ability to forecast accurately."
Moreover, point forecasts, such as that the S&P/ASX 200 Index (ASX: XJO) will be 7000 points by the end of the year, don't provide any information about risks.
"They are conditional upon information available when the forecast is made. As new information appears, the forecast should change," said Oliver.
"Setting an investment strategy for the year based on forecasts at the start of the year and not adjusting for new information is a great way to lose money."
Why do we crave forecasts though?
So if economic and market forecasts are such baloney, why do investors see so much of it?
This also goes back to human urges.
"Fundamentally, people hate uncertainty and will try to remove it. So, precise quantified forecasts seem to provide a degree of certainty in an otherwise uncertain world," said Oliver.
"And if we don't have the expertise, the experts must know."
Another behavioural tendency that gives so much credence to forecasters is loss aversion. This is where humans feel the pain of loss so much more than the joy of an equal amount of gain.
"This leaves us more risk averse, and it also leaves us more predisposed to bad news stories as opposed to good," said Oliver.
"Flowing from this, prognosticators of gloom are more likely to be revered as 'deep thinkers'."
Investors should do this instead of reading forecasts
So rather than read macroeconomic predictions, Oliver suggested sticking to an investment strategy with discipline is far better.
Investing for the long term was an obvious way to ride out short-term economic bumps.
Oliver quoted US investment professional Charles Ellis, who observed in the 1970s that, for most investors, investing is a "loser's game".
A loser's game is where whoever makes fewer mistakes wins.
"Amateur tennis is an example where the trick is to avoid stupid mistakes and win by not losing," said Oliver.
"The best way for most investors to avoid losing at investments is to invest for the long term. Get a long-term plan that suits your level of wealth, age, tolerance of volatility, etc. — and stick to it."
