Wall Street is just a street in Manhattan. But “Wall Street” is an industry that preys on your emotions. From the investment guru on TikTok to the former hedge fund trader with an X account to the big investment firms to your stock broker, they’ll do anything to get your attention. They have a story to tell you, a great story about their ability to divine the future. And it’s all fiction.

The Top 3 Lies Told By Wall Street

1. We can predict the future course of the economy

Every year, sometime in December, the “Wall Street” seers publish their Outlook For The Coming Year. These tomes are filled with long discussions about how the economy will perform over the next year, whether interest rates will rise or fall, how much the economy will grow, and how markets will react.

Consensus Economics compiles economic forecasts and averages them to arrive at a consensus expectation for numerous economic series. In December of 2022, their consensus expectation for 2023 US Real GDP growth was 0.2%. Well, at least they got the sign right – although plenty of them were predicting an outright recession for 2023. Actual growth was +2.5%.

Shorter-term forecasts are slightly more accurate but not very. In December of 2022, the consensus expectation for growth in the 4^th Quarter of 2022 was 1.1%. The initial release by the Bureau of Economic Analysis showed actual growth at 2.9%. Even with two thirds of the quarter already over, the consensus estimate was less than half the actual.

2. We can predict stock prices because we can predict earnings

For 2022, the consensus earnings estimate for the S&P 500 was $221 which was a mere $1 off the actual. Unfortunately, for the Wall Street seers, they also predicted, based on that earnings forecast, that the stock market would rise. Instead, stocks fell over 18%.

How could they be so right about earnings and so wrong about the stock market that they didn’t even get the direction right? Because they were completely and utterly wrong about interest rates. The consensus was that the Fed Funds rate (the rate set by the Federal Reserve) would be 0.5% at the end of 2022. Instead, it was 4.5%.

How did they get interest rates so wrong? They completely and utterly failed to foresee a surge in inflation. Estimates for inflation (CPI) in early 2021 were right around the Fed’s target of 2%. Estimates rose throughout the year but were still less than 3% by mid-year. It wasn’t until the 4^th quarter that estimates for 2022 inflation rose above 4%. The actual inflation rate for 2022 was 8%.

And the fact the analysts got the earnings estimate right for 2022 was just luck. Over the last five years, on average, 77% of companies in the S&P 500 reported earnings that were above the consensus. Over the last 10 years, the average is 74%. Another 16% or so report earnings less than the consensus which means that analysts get it right just 7% of the time. And they aren’t just off a little. For the last five years the average upside surprise was 8.5% above the consensus estimate.

3. We can get you out before the market drops and back in before it goes back up

A lot of the predicting “Wall Street” attempts is driven by a desire to avoid markets that are going down and embrace those that are going up. Of course, you want to avoid bear markets and participate in bull markets and most people believe it is the job of “Wall Street” to provide them guidance to do exactly that.

Wall Street is nothing if not accommodating so they give it their best shot because the payoff for being right – or lucky – can be enormous. They want you to believe that they can see the turns in the markets before everyone else because they understand something everyone else doesn’t.

It may be something arcane, something related to the monetary system, or some other equally opaque or obscure topic. Or it may be a “secret” they’ve discovered that no one else knows about yet. They might even hint that someone in authority has shared this information with just them. Whatever the angle, it will be a captivating story that sounds very plausible and offers large gains if you just open an account or subscribe to their service.

It’s a lie. They don’t “know” anything more about the future than your local palm reader.

Investing isn’t about predicting the future; good thing since Wall Street isn’t any good at it. No one can predict the future. Not Wall Street, not you, and not us. Luckily it isn’t necessary to be a good investor.

Market timing, the attempt to sell before something goes down and buy before it goes up, is impossible. Saying you can is the equivalent of saying you can predict the collective behavior of millions of investors. That is, obviously, impossible. So stop.

To be a successful investor, you need to:

• Develop a cohesive investment strategy around specific goals that is appropriate for your capacity to take risk and tolerate drawdowns. A strategy cannot work if you abandon it during financial market declines. That is a recipe for buying high and selling low. No one strategy works all the time and you need to be able to stick to it.
• Make tactical changes to your portfolio that are rooted in historical statistical evidence. Tactical changes should be infrequent. Avoid frequent changing of your investments and gambling, rather than investing. The answer to the question “what should I do to my portfolio today” is almost always “nothing” if you have a good strategy.
• Identify a proper benchmark to measure and evaluate your performance against. Make changes and adjustments based on quantifiable results. Measure performance in the context of after-tax returns. Keep in mind you cannot effectively manage what you don’t measure.
• Adopt different strategies for different timeframes. Treasury bills, certificates of deposit, money market funds, and other cash-like investments are appropriate low-risk investments for short-term time periods. However, over long-term time periods, such cash-like investments are at risk of significant underperformance to riskier investments and in the worst case of even losing value on an inflation-adjusted basis.
• Avoid chasing fads, investing in expensive or high-fee investment products and not taking future inflation into account, such as with annuity products that offer promised fixed returns, which are not adjusted for future inflation, and may be unable to keep up with cost-of-living increases.

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