Besides bluffing, liquidity search, and irrational investment decisions, vague market forecasts present high risks for the unsophisticated crowds.
Every day on the financial mainstream and social media, some experts or analysts make forecasts about the direction of capital markets. Some think this is the time to be 100% in stocks; others argue stocks are overvalued, so it is time to buy bonds. Some insist bonds are long-term shorts. Others believe commodities are about to crash or rally, or the dollar will fall or rise.
The average unsophisticated investor gets very confused trying to sort through all those forecasts. When well-known experts hold opposing forecasts about the markets, they must choose a side and elevate one to an indisputable authority. The result is often cult-like behavior.
What unsophisticated investors and traders often fail to understand is that some of us, who have been in the market for a long time and have experienced numerous market cycles, understand that “experts” and “analysts” may have different motivations for making forecasts, including bluffing and searching for exit liquidity. Usually, disclosures in small print cover these gray areas.
There are three fundamental truths about markets that everyone should know:
1. It is irrational to reveal positioning before the development of a trend or near the end of its reversal, as the expected gain decreases.
2. Large investment banks and funds need liquidity to exit positions so that they can minimize adverse impact. Arguing that an uptrend will continue while looking for suitable exit levels is a gray area if small print disclosures are made.
3. This is the most important truth: market forecasts without specific entry and exit levels or signals are suspicious and/or worthless.
About #3: Almost daily, some “gurus,” “experts,” or “celebrity investors” argue that this or that market is a buy or a short, etc. In my 35 years in the markets, I have witnessed hundreds, if not thousands, of such market forecasts without reference to specific entry and exit levels or signals, except in the case of market technicians who use technical analysis and patterns and have a limited reach and success rate.
For instance, some experts assert that the US dollar is in a short position or that stocks will undergo a significant correction, implying a position. If the market moves against them, they may claim post hoc that they got out soon enough to limit losses or even realize a small profit. No one can verify that. This is why forecasts lacking specific entry and exit levels or reference to an exit signal typically lack value due to their inability to be verified.
During the last 14 years on financial social media, I have seen thousands of forecasts but very few losers; mostly everyone is a winner. This is irrational behavior, as losing is an inherent part of the market game. However, the motivation for this irrational behavior is the desire of the unsophisticated crowds for a perpetual winner and a market god. Influencers and celebrities are well-aware of this behavioral bias of the crowds, and they refuse to acknowledge that they have ever lost, preferring to present themselves as winners. This necessitates avoiding mentioning specific entry and exit levels or signals ex ante but only post hoc.
As a systematic trader since the 1990s who began strictly as a quant and had no prior knowledge of technical analysis or fundamentals, I find the biases of the unsophisticated crowds stunning, and this is also the reason they are the biggest losers in the markets.
Early on, the educational system should teach people that markets have winners and losers, and a winner cannot see a credit in their account if some losers have no debit. In my introductory book Profitability and Systematic Trading (Wiley 2008), I call this a zero-sum game, but if this term triggers some people, they can call it anything they want, including the most obvious: winners and losers.
The education system should also teach people that markets are competitive and asymmetric information plays an important role in the selection of winners and losers. There is high motivation to create conditions of asymmetric information, even when there is none.
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