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Investment forecasters and horse-race gamblers

A huge audience tuned in to a sporting event that took place in my hometown over the weekend: the Kentucky Derby. In addition to the tens of millions who watched on television, almost 156,000 crowded into Churchill Downs on a rainy day to experience the tradition, wagering, and cheering firsthand.

Before the race, a "vote" was taken as to which horse would win. Participants voted with their pocketbooks by placing their bets, and the horse on which the most money was wagered became the favorite. Rarely do the fans in any sport spend more time studying data, reading commentary, or listening to experts before reaching a decision.

The eventual favorite reflected the collective wisdom of the racing world. Given this, you'd expect the favorites in this race to have a record of success. Surprisingly, you'd be wrong — very wrong.

Over the past 30 years (including this past Saturday when pre-race favorite "Lookin At Lucky" came in sixth), the favorite has made it into the winner's circle only twice. That's a failure rate of 94%!

Based on their extensive knowledge of the horses' recent histories, people "in the know" make educated judgments about how the horses will perform on a given day. But actually, they're just guessing. No one knows for sure.

In a sense, the financial markets aren't much different. When an investing professional offers stock, bond, and mutual fund recommendations, he doesn't know where the markets are going any more than you do.

He knows where they've been, of course; that is, he knows how they've behaved in the past under similar economic circumstances. Based on that knowledge, he forms opinions as to how the markets will behave in the near future. But reality isn't that simple.

There are two difficulties in making accurate forecasts. The first is that one or more of the governing assumptions will turn out to be wrong. The forecasters don't know which ones, so they can't fix them. The other is that the underlying assumptions are incomplete. But the forecasters don't know which factors have been left out, so they can't include them.

Despite this, publishers of the leading financial magazines and web sites regularly offer bold headlines such as "Where to put your money now" or "Eight stocks to buy today."

This incorrectly conveys a sense of predictability concerning the economy and markets, and downplays the reality of risk. (Frankly, financial magazines have a mediocre track record when it comes to their specific investment recommendations.)

Sound Mind Investing typically doesn't make forecasts as to what the future holds for the markets. We're willing to admit we're clueless about that. It's our belief, however, that it is impossible to self-destruct financially if your decision-making is pointed in the direction of God's glory.

One characteristic of investing that glorifies God is that it respects His wisdom, not man's. If it's your desire to have confidence in managing your finances rather than relying on the guesswork of others, ask God to help you learn the essential basics you need to become a faithful and effective steward. In tandem with your praying, begin your education by reading our recent Financial Literacy 101 series.

And here's something to keep in mind: Asking for the Lord's help is not a gamble. It's a sure thing. "If any of you lacks wisdom, he should ask God, who gives generously to all without finding fault, and it will be given to him" (James 1:5).

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