Known Unknowns - By Neel Kashkari

We believe investment managers can analyze numerous data sources and apply lessons learned from past economic cycles to make reasonable assessments about the global economic outlook.

We also believe managers can make reasonable judgments about asset classes over the long term and, through rigorous bottom-up research, develop an edge regarding the outlook for individual companies.

However, the market as a whole is much better at aggregating all the information that could affect any of the thousands of companies in the stock market than any investor could possibly be. Hence predictions of where the stock market will close on a given date are likely to be wrong.

People love bold predictions. More precisely: People love people who make bold predictions that are eventually proven correct. We tend to put such soothsayers on pedestals and anoint them heroes. And why shouldn’t we? They were able to see important outcomes that the rest of us missed.

Consider two notable examples:

• In 1969 quarterback Joe Namath boldly guaranteed his underdog New York Jets would beat the Baltimore Colts to win the Super Bowl. An audacious prediction, when Namath successfully led his team to beat the Colts he ensured his place in sports history.
• In 1961 President Kennedy called for the nation to land a man on the moon and return him safely to Earth by the end of the decade. At the time an American hadn’t even orbited the Earth, let alone made it to the moon. Considering today it takes almost a decade just to design a new rocket, Kennedy’s call to action from virtually a blank sheet of paper was truly a “moon shot.”

But our memories tend to be skewed: we remember the heroes but often forget the bold predictions that fell flat. For example:

• What was the name of the pastor who predicted the world would end on May 21, 2011? I can’t remember either. I’m sure I would remember had the world actually ended. (Well, maybe not, but you get my point.)
• In December 2007 sell-side equity strategist Abby Joseph Cohen predicted the S&P 500 would climb from 1,463 to reach 1,675 by the end of 2008. Given the brewing financial crisis, this was a bold call. In fact, the crisis dramatically worsened and the S&P 500 ended 2008 at 903. As the U.S. crisis recedes into memory, people have moved on.