The Tortoise and the Hare: Why Most Investment Predictions Fall Short

Bedtime at the Bykovsky house is always an adventure. It feels less like a peaceful wind-down and more like a full-scale production. The night begins with the chaotic chase to get our energetic 5-year-old triplet boys into pajamas—sometimes inside out, sometimes hilariously mismatched—and wraps up with elaborate negotiations over how many bedtime stories they absolutely need.

One recent night, we read an interesting fable about “The Tortoise and the Hare.” For those unfamiliar with the story, it’s about a boastful hare who mocks a slow tortoise, who then challenges him to a race. Confident in his speed, the hare sprints ahead and naps midway, certain of his victory. Meanwhile, the tortoise moves steadily, overtaking the sleeping hare to win the race.

The tale is old but timeless, teaching us the true ingredients for lasting success: persistence, focus, and humility. While wrapping up the story, I couldn’t help but reflect on its relevance to investing. These words of wisdom are more pertinent than ever for investors navigating the complex world of markets and financial predictions. Much like the hare, investors want to race ahead and tend to fall victim to bold market predictions and flashy trends.

Predictions Are More Interesting Than Useful

As my colleague Matt DeVries highlights in his 4th Quarter 2024 commentary, “Predictions are more interesting than useful.” The chart below, by Dimensional Fund Advisors, is a compilation of the return forecasts of numerous major financial institutions for the S&P 500 for 2024. Going into 2024, nearly half of the experts predicted a negative year for the S&P 500 index. Remarkably, all of them believed the S&P would grow by less than the historical average rate of return of 12.3% in 2024. It’s no secret, the experts were all wrong. The S&P 500 Index returned a 25% (includes dividends) in 2024, on the back of a strong year in 2023 when it was up 26%! This far exceeded expectations from analysts polled at the end of 2023.

The dispersion in predictions highlights the importance of sticking to a long-term investment plan rather than basing your decisions on predictions. So why is it that most predictions in the investment world are likely flawed?

Complex Web

One major reason is financial markets are a complex system. They operate within a tangled web of variables such as economic data, political events, technological breakthroughs, consumer behavior, and human psychology. These powerful forces interact unpredictably, often leading to outcomes that defy rational logic.

Take geopolitical events as an example. A sudden trade embargo or an unexpected war can send shockwaves through stock markets, commodities, and currencies in ways no model can predict.

Pitfalls of Historical Data

One common trap is overreliance on historical data. Many projections assume trends will stay steady, yet history has shown us how easily these assumptions fall apart.

Remember the 2008 financial crisis? Investors at the time assumed housing prices would keep rising, based on historical data. They underestimated systemic risks like subprime mortgages and excessive leverage. When the housing bubble burst, those overly optimistic projections came crashing down.

Human Biases

Then there is the human factor. Predicting isn’t just about data. It is influenced by human psychology. Investors, no matter how experienced, credentialed or skilled, are prone to biases that can skew their predictions.

Take confirmation bias, for instance. It causes investors to seek evidence that supports their existing views while ignoring data that challenges them. Overconfidence is another trap. It causes the investor to predict outcomes with a false sense of certainty, often resulting in forecasts that are far too optimistic or pessimistic.

Then there’s herd mentality, where investors follow popular opinion rather than questioning it. A classic example is the dot-com bubble of the late 1990s. Investors, driven by overconfidence and herd behavior, made sky-high predictions for tech stocks. When the bubble finally burst, the lofty predictions left investors with massive losses. This serves as a powerful reminder that biases can cloud even the most experienced and rational minds.

The Wildcards

Wildcards are the hardest to predict. The unforeseen variables are often the ones that can throw the entire game plan off balance. For example, a sudden interest rate hike from the Federal Reserve can send shockwaves through the markets, rendering the most robust forecasts ineffective.

Similarly, technological disruptions often outpace expectations. A prime example is the launch of the iPhone in 2007. It reshaped the tech world and the global economy, turning smartphones from niche gadgets into everyday essentials. Its intuitive design and app ecosystem disrupted industries like photography, music, retail, and transportation.

Then there are black swan events, rare significant events like the COVID-19 pandemic, which can upend economic conditions in ways no model could predict. These are just a few factors serving as powerful reminders that even the best predictions are vulnerable to the unexpected.

Hidden Motives

Not only does the investor have to deal with complexity, the human factor, and wildcards, hidden motives often play a role too. Financial institutions, Wall Street analysts, and corporations all have their agendas, which can influence the numbers they present.

Sell-side analysts may issue rosy projections to win favor with corporate clients. Companies may sometimes play it safe, offering conservative corporate earning guidance to manage investor expectations. Investors often base their predictions on these numbers, creating a ripple effect of distorted data.

These conflicts of interest make it challenging for investors to distinguish unbiased analysis from projections driven by self-interest.

Our View

We believe the timeless lesson of “The Tortoise and the Hare” serves as a powerful blueprint for investing: Slow and steady truly wins the race. Markets are inherently unpredictable, shaped by complex variables, human biases, and unexpected disruptions. Here at Bragg Financial, one of our main core tenants is humility. We acknowledge that we don’t have a crystal ball. Rather than chasing trends or relying on flawed predictions, we are focused on building diversified portfolios rooted in fundamentals and a long-term investment strategy.

This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.