GMO 7 year forecasts are worse than a toss of a coin

[InvestInPasta]

- ref: https://pensionpartners.com/the-next-7-years/

They basically got 3 forecasts (emerging bond, us bonds and tips) out of 11.

Now I better understand Bogle's words about forecasters like Rob Arnott. When they asked him "How do you sum up your feelings about Rob Arnott?" - he replied: "I wish I was as sure of anything as he is of everything"
- https://vimeo.com/241479867/description minute 40

[willthrill81]

But it's different now. Now we're supposed to listen to all of the experts beating the valuations drum who are telling us that U.S. stocks will return 1-3% real over the next 10 years. And we should do because they've been consistently accurate with their prior predictions.

[Tycoon]

Three of 11. Now there's a surprise. I would expect 0 of 11.

[Tdubs]

I'd also give them international large EAFE.

[nisiprius]

Thanks for this! Yes, I remember now... GMO's forecasts usually get discussed in this forum... GMO was so sure that emerging markets stocks would outperform US stocks, and by a large amount.

So all of this prompts the question: given the size of those errors, why don't they at have the humility to state their forecasts as whole-number percentages, instead of pretending they can forecast with the accuracy implied by "7.6%" or "2.3%?"

[asset_chaos]

They got the signs right.

[asif408]

So all of this prompts the question: given the size of those errors, why don't they at have the humility to state their forecasts as whole-number percentages, instead of pretending they can forecast with the accuracy implied by "7.6%" or "2.3%?"

Would anyone pay attention to them if they used a range +/- 10%? They would be laughed at, even though it's actually much more funny to see estimates using decimal places.

[Nate79]

And yet we still have threads like "what return do you expect for the next 10 years" or "Bogle predicts x%" blah blah blah.

[AlohaJoe]

And yet we still have threads like "what return do you expect for the next 10 years" or "Bogle predicts x%" blah blah blah.

I don't disagree yet....all GMO has really done is to take the very common "I'm worried about valuations" and "this the longest bull market EV-AR and there will be a correction ANY DAY NOW, so should I DCA instead of lump sum" statement that so many people actually make and actually follow it through to its logical conclusion and put an actual number on it.

At some level, I appreciate their intellectual honesty and their willingness to actually put a number on it instead of the usual vague handwaving.

Put another way: if you are a person who "thinks things are overvalued" then in what precise ways is your forecast any different than GMO's forecast?

(There's also some interesting tribal affiliation going on where we-as-a-group laugh at GMO/Research Affiliate's forecasts but post Bogle's market forecasts in triplicate 3 seconds after every interview he gives.)

[Whakamole]

Thanks for this! Yes, I remember now... GMO's forecasts usually get discussed in this forum... GMO was so sure that emerging markets stocks would outperform US stocks, and by a large amount.

Don't forget timber:

Jeremy Grantham, co-founder and chief investment strategist at GMO, the asset manager based in Boston, calls timber “a perfect investment” for someone with a time horizon of, say, 20 years or more. “Timber is safer than stocks but not quite as safe as Treasury inflation-protected bonds,” he said. “And as long as the sun shines and the rain rains, trees grow.”

[JoMoney]

Sounds about right. Jeremy Grantham is a smart guy, who makes reasonable and persuasive arguments, but he is a perma-bear. Being a cynic sounds smart, but it hasn't paid off very well in the markets.
This is old, but in CXO's look at various 'gurus' Grantham didn't fair very well there either
https://www.cxoadvisory.com/gurus/

[InvestInPasta]

This is old, but in CXO's look at various 'gurus' Grantham didn't fair very well there either
https://www.cxoadvisory.com/gurus/

+1

[nisiprius]

Jeremy Grantham, co-founder and chief investment strategist at GMO, the asset manager based in Boston, calls timber “a perfect investment” for someone with a time horizon of, say, 20 years or more. “Timber is safer than stocks but not quite as safe as Treasury inflation-protected bonds,” he said. “And as long as the sun shines and the rain rains, trees grow.”

That sounds like an obvious salesman's pitch.

Chestnut blight.

Dutch Elm disease.

Timber theft (It's been estimated that nearly 10% of all trees grown for timber are stolen).

[jjustice]

I don't understand. How are seven-year forecasts to be evaluated? By how close one of them got? Does GMO say that their forecasts will never turn out to be way off? They surely are not that naïve. I seem to remember that Professor Tower of Duke University did an analysis of GMO forecasts over a period of years that found that they were pretty good. Perhaps someone remembers that report?

How would you go about forecasting asset-class performance with a coin toss? How accurate would that method (whatever it is) have been from 2011 to 2018? Would it have beaten the GMO forecast?

John

[asif408]

This is old, but in CXO's look at various 'gurus' Grantham didn't fair very well there either
https://www.cxoadvisory.com/gurus/

+1

FWIW, here is CXO's look at GMO's 1999 forecast: https://www.cxoadvisory.com/3124/indivi ... -forecast/

Not perfect, but pretty good.

[gmaynardkrebs]

I don't understand. How are seven-year forecasts to be evaluated? By how close one of them got? Does GMO say that their forecasts will never turn out to be way off? They surely are not that naïve. I seem to remember that Professor Tower of Duke University did an analysis of GMO forecasts over a period of years that found that they were pretty good. Perhaps someone remembers that report?

How would you go about forecasting asset-class performance with a coin toss? How accurate would that method (whatever it is) have been from 2011 to 2018? Would it have beaten the GMO forecast?

John

My takeaway is that GMO's current estimates aren't really that far from the mainstream estimates. Grantham does not predict that an equity or bond crash is imminent; in fact, he sees a distinct possibility that the current state of affairs will persist for a long time. Where he does depart from the mainstream is his view that the current valuations are not merely "rich" (the mainstream view), but are in fact extremely detached from fundamental value. To me that signals the the price floor in a crash is a lot lower than even 2008, and that a severe decline, if it occurs, will last a lot longer than it did in 2008. He points out that most of the returns from the market since 2008 were from PI expansion, which he does not see happening again.

[InvestInPasta]

FWIW, here is CXO's look at GMO's 1999 forecast: https://www.cxoadvisory.com/3124/indivi ... -forecast/

Not perfect, but pretty good.

Even a broken clock is right twice day.

[minimalistmarc]

I don't understand. How are seven-year forecasts to be evaluated? By how close one of them got? Does GMO say that their forecasts will never turn out to be way off? They surely are not that naïve. I seem to remember that Professor Tower of Duke University did an analysis of GMO forecasts over a period of years that found that they were pretty good. Perhaps someone remembers that report?

How would you go about forecasting asset-class performance with a coin toss? How accurate would that method (whatever it is) have been from 2011 to 2018? Would it have beaten the GMO forecast?

John

My takeaway is that GMO's current estimates aren't really that far from the mainstream estimates. Grantham does not predict that an equity or bond crash is imminent; in fact, he sees a distinct possibility that the current state of affairs will persist for a long time. Where he does depart from the mainstream is his view that the current valuations are not merely "rich" (the mainstream view), but are in fact extremely detached from fundamental value. To me that signals the the price floor in a crash is a lot lower than even 2008, and that a severe decline, if it occurs, will last a lot longer than it did in 2008. He points out that most of the returns from the market since 2008 were from PI expansion, which he does not see happening again.

Your takeaway seems pretty random.

[gmaynardkrebs]

I don't understand. How are seven-year forecasts to be evaluated? By how close one of them got? Does GMO say that their forecasts will never turn out to be way off? They surely are not that naïve. I seem to remember that Professor Tower of Duke University did an analysis of GMO forecasts over a period of years that found that they were pretty good. Perhaps someone remembers that report?

How would you go about forecasting asset-class performance with a coin toss? How accurate would that method (whatever it is) have been from 2011 to 2018? Would it have beaten the GMO forecast?

John

My takeaway is that GMO's current estimates aren't really that far from the mainstream estimates. Grantham does not predict that an equity or bond crash is imminent; in fact, he sees a distinct possibility that the current state of affairs will persist for a long time. Where he does depart from the mainstream is his view that the current valuations are not merely "rich" (the mainstream view), but are in fact extremely detached from fundamental value. To me that signals the the price floor in a crash is a lot lower than even 2008, and that a severe decline, if it occurs, will last a lot longer than it did in 2008. He points out that most of the returns from the market since 2008 were from PI expansion, which he does not see happening again.

Your takeaway seems pretty random.

How so?

[asif408]

FWIW, here is CXO's look at GMO's 1999 forecast: https://www.cxoadvisory.com/3124/indivi ... -forecast/

Not perfect, but pretty good.

Even a broken clock is right twice day.

So what is the point of your post? You say their forecasts are worse than the toss of a coin. One was, one wasn't. I'm not sure what you are trying to prove. Is there any actionable item from your post?

[JBTX]

And yet we still have threads like "what return do you expect for the next 10 years" or "Bogle predicts x%" blah blah blah.

I don't disagree yet....all GMO has really done is to take the very common "I'm worried about valuations" and "this the longest bull market EV-AR and there will be a correction ANY DAY NOW, so should I DCA instead of lump sum" statement that so many people actually make and actually follow it through to its logical conclusion and put an actual number on it.

At some level, I appreciate their intellectual honesty and their willingness to actually put a number on it instead of the usual vague handwaving.

Put another way: if you are a person who "thinks things are overvalued" then in what precise ways is your forecast any different than GMO's forecast?

(There's also some interesting tribal affiliation going on where we-as-a-group laugh at GMO/Research Affiliate's forecasts but post Bogle's market forecasts in triplicate 3 seconds after every interview he gives.)

I'm in the minority here who likes and finds value in GMO newsletter. You can learn quite a bit. I certainly don't live by their forecasts, but they help me process the risk involved. Grantham has been pretty good at calling some macro trends, but he is often way too early, and it is practically impossible to take those predictions and act on them profitability.

He is also intellectually honest and pretty humble about his fallabilty and often prefaces that the 7 year forecast is a mean reversion methodology and may very well be wrong. He personally expects a much longer mean reversion term than 7 years.

You probably won't make extra money using his forecasts. You may lose some upside. But integrating his ideas may help reduce downside risk and possibly volatility.

[JBTX]

Jeremy Grantham, co-founder and chief investment strategist at GMO, the asset manager based in Boston, calls timber “a perfect investment” for someone with a time horizon of, say, 20 years or more. “Timber is safer than stocks but not quite as safe as Treasury inflation-protected bonds,” he said. “And as long as the sun shines and the rain rains, trees grow.”

That sounds like an obvious salesman's pitch.

Chestnut blight.

Dutch Elm disease.

Timber theft (It's been estimated that nearly 10% of all trees grown for timber are stolen).

Not to mention housing crashes that tend to lead to.....wait for it....less demand for timber. Timber is definitely his weak spot.

[staythecourse]

Jeremy Grantham, co-founder and chief investment strategist at GMO, the asset manager based in Boston, calls timber “a perfect investment” for someone with a time horizon of, say, 20 years or more. “Timber is safer than stocks but not quite as safe as Treasury inflation-protected bonds,” he said. “And as long as the sun shines and the rain rains, trees grow.”

That sounds like an obvious salesman's pitch.

Chestnut blight.

Dutch Elm disease.

Timber theft (It's been estimated that nearly 10% of all trees grown for timber are stolen).

Not to mention housing crashes that tend to lead to.....wait for it....less demand for timber. Timber is definitely his weak spot.

A weak spot for a reason. GMO hold a timber TIMO which is LARGE. No surprise their forecasts always have timber doing well.

Good luck.

[JBTX]

In all fairness timber has been pretty good investment. That doesn't mean it will continue to be.

https://www.forestinvest.com/why-timber/

[willthrill81]

In all fairness timber has been pretty good investment. That doesn't mean it will continue to be.

https://www.forestinvest.com/why-timber/

My parents planted many acres of trees for timber in the early 1980s. Until recently, I thought that their initial outlay would have done better in stocks, especially since they were on such a tear for so long. But today, the value of the timber is surprisingly similar to what the stocks would be worth today, although the timber would probably come out ahead due to tax drag on the stocks (they couldn't have put much of their investment in tax-advantaged accounts). And the timber profit will be taxed at the relatively favorable long-term capital gains rates as well.

[psteinx]

will - As someone who's poked around at timber as an investment category in the past (but not taken the plunge), I'd be interested in as much detail about your parents' investments as you might be willing and able to share.

Specifically:

Did they acquire the land specifically for this purpose, or was it land they already had somehow?
What condition was the land in, when planted?
About how many acres?
About where, geographically?
What kinds of trees planted?
How much effort, as things grew?
Current status, amounts harvested, plans for the future?

I realized that's a fair amount to ask for a casual post you've made. And there have been past threads on this kind of thing. Still, I'd be interested.

(FWIW, when I've investigated various approaches to direct timber investing, in Missouri (my state), I was not too impressed with my expected returns. But then, I don't think Missouri is maybe the best place to do this, or at least, not at the time I was mainly investigating - around 4-8 years or so ago...)

[InvestInPasta]

So what is the point of your post? You say their forecasts are worse than the toss of a coin. One was, one wasn't. I'm not sure what you are trying to prove. Is there any actionable item from your post?

No there isn't, this thread is just food for thought.
Anyway I appreciated your post, I'm surprised they got one forecast right. I didn't know.

[InvestInPasta]

I'm in the minority here who likes and finds value in GMO newsletter. You can learn quite a bit. I certainly don't live by their forecasts, but they help me process the risk involved.

But how do they help you?
Do you reduce equity exposure of your portfolio based on their forecast?
Do you increase equity exposure to those regions with the best expected returns? (now it would be MSCI Emerging according to their forecast)

Grantham has been pretty good at calling some macro trends, but he is often way too early, and it is practically impossible to take those predictions and act on them profitability.

He is also intellectually honest and pretty humble about his fallabilty and often prefaces that the 7 year forecast is a mean reversion methodology and may very well be wrong. He personally expects a much longer mean reversion term than 7 years.

I have never said or even thought that Grantham or Montier were dishonest loudmouth.
I'm simply clueless of what is the purpose to post once a month a forecast that has proved to be wrong in a decade.

You probably won't make extra money using his forecasts. You may lose some upside. But integrating his ideas may help reduce downside risk and possibly volatility.

Again, how do they help you reducing downside risk?

[staythecourse]

So what is the point of your post? You say their forecasts are worse than the toss of a coin. One was, one wasn't. I'm not sure what you are trying to prove. Is there any actionable item from your post?

No there isn't, this thread is just food for thought.
Anyway I appreciated your post, I'm surprised they got one forecast right. I didn't know.

Well I think it is QUITE actionable. The moral of the story is NOT to jump all over GMO and Mr. Granthem, but to reinforce for those who need it (and based on posts I see everyday on this site folks still need it) that active management is a losers game.

Good luck.

[JBTX]

I'm in the minority here who likes and finds value in GMO newsletter. You can learn quite a bit. I certainly don't live by their forecasts, but they help me process the risk involved.

But how do they help you?
Do you reduce equity exposure of your portfolio based on their forecast?
Do you increase equity exposure to those regions with the best expected returns? (now it would be MSCI Emerging according to their forecast)

Grantham has been pretty good at calling some macro trends, but he is often way too early, and it is practically impossible to take those predictions and act on them profitability.

He is also intellectually honest and pretty humble about his fallabilty and often prefaces that the 7 year forecast is a mean reversion methodology and may very well be wrong. He personally expects a much longer mean reversion term than 7 years.

I have never said or even thought that Grantham or Montier were dishonest loudmouth.
I'm simply clueless of what is the purpose to post once a month a forecast that has proved to be wrong in a decade.

You probably won't make extra money using his forecasts. You may lose some upside. But integrating his ideas may help reduce downside risk and possibly volatility.

Again, how do they help you reducing downside risk?

First, I never said anything specifically about you or anybody else who may not be fans of Grantham. I will say Montier is much more adamant and assertive which makes him a target when things don't turn out as planned. Grantham is much more humble because he's been through this many times before.

You can learn a lot reading their stuff even if you don't directly use it. Do I lower my equity allocations or change country weightings slightly based upon their information? Maybe. But I don't rely on the 7 year forecasts. Those are only indications of what would happen if things mean revert.

Ignore Grantham at your peril. He tends to be right more often than not, but he is often very far ahead of what actually happens and misses a lot of the upside. I don't trade on his info but it does inform my macro view.

Bogle has said positive things about Grantham on occasion and as aloha Joe said both Bogle and Grantham are really saying the same thing now about the next 10 years. If I had to bet, Bogle reads the Grantham stuff and uses it to inform his world view. He just doesn't use it to change his investing strategy, at least not materially. I think he does mention at times it isn't unreasonable to tweak AA based on market valuations. He is far more pragmatic and less ideological than many Bogleheads here.

[FIREchief]

"If they blundered at all, it was in assuming “normalcy” and believing that “predicting market outcomes is relatively straightforward.” There is nothing “normal” about the distribution of investment returns and nothing straightforward about arriving at a specific return number (to one decimal place) over a 7-year period. There is a huge difference between valuation and timing, and the range of possible outcomes over a 7 year period, particularly within in equities, is enormous."

Well Duh...

[JBTX]

Grantham has a long track record. He was right about indexing, an investment strategy he took a lead role in inventing, when everyone else assumed that you should try to beat the market rather than join it, and about the long rally in small-cap stocks in the early 1970s, the bond rebound in 1981 and the resurgence of large-cap growth stocks in the early 1990s. He was also, well in advance, right about one bubble after another: Japan in 1989, tech stocks in 2000, the U.S. housing market and financial markets and global equities in 2008 (in the wake of which, when investors were still reeling, he made a celebrated and early bullish call in a letter titled, “Reinvesting When Terrified”).

Jack Bogle, the founder of Vanguard, who noted that Grantham “ran money for Vanguard for a while, and it didn’t work out that well,” says of him: “He’s been very, very good in his forecasts. In times of great bullishness, he’s the skunk at the garden party, and in times of bearishness, he’s saying, ‘Don’t give up.’ ”

https://www.nytimes.com/2011/08/14/maga ... ayhem.html

[rj49]

I wouldn't call Grantham a permabear--he came out last year and admitted there's no use in battling against conditions perfect for market advances (although of course he predicted an eventual crash). The issue is what do to about his forecasts, especially since people are fleeing his company due to underperformance, and VG took away $2 billion managed by GMO in 2008 also. Grantham also loses people when he advises investing in things like timber and potash. He at least seems willing to change his mind, whereas bears like Jon Hussman and Marc Faber always are predicting imminent market disaster.

But if a 7-year forecast seems arbitrary, just read Rick Ferri's 30-year forecasts--he must have some crystal ball.

[JBTX]

I wouldn't call Grantham a permabear--he came out last year and admitted there's no use in battling against conditions perfect for market advances (although of course he predicted an eventual crash). The issue is what do to about his forecasts, especially since people are fleeing his company due to underperformance, and VG took away $2 billion managed by GMO in 2008 also. Grantham also loses people when he advises investing in things like timber and potash. He at least seems willing to change his mind, whereas bears like Jon Hussman and Marc Faber always are predicting imminent market disaster.

But if a 7-year forecast seems arbitrary, just read Rick Ferri's 30-year forecasts--he must have some crystal ball.

I enjoy reading his musings, but you have to take them with a grain of salt. After all his research on bubbles he came out and said that the commodity run was more than just a bubble and brought about by various real factors. The next year commodities tanked and still have not recovered many years later. I recall the speculation that we may run out of potash in 20 years. He is very studied and lots of research informs his opinions, but the randomness of the world we live in blows up his conclusions. He has been a fed hater for years, and I think some of his conclusions are wrong there also. But he is an independent thinker and is always thought provoking.

[gmaynardkrebs]

So what is the point of your post? You say their forecasts are worse than the toss of a coin. One was, one wasn't. I'm not sure what you are trying to prove. Is there any actionable item from your post?

No there isn't, this thread is just food for thought.
Anyway I appreciated your post, I'm surprised they got one forecast right. I didn't know.

Well I think it is QUITE actionable. The moral of the story is NOT to jump all over GMO and Mr. Granthem, but to reinforce for those who need it (and based on posts I see everyday on this site folks still need it) that active management is a losers game.

Good luck.

What I see every day is the belief that passive management is some sort of panacea. It is not, unless you believe being down 40% when your active friends are down 42% is some sort of consolation. If passive investing helps you sleep better at night, who am I to say otherwise, but it doesn't solve the "big one."

[staythecourse]

So what is the point of your post? You say their forecasts are worse than the toss of a coin. One was, one wasn't. I'm not sure what you are trying to prove. Is there any actionable item from your post?

No there isn't, this thread is just food for thought.
Anyway I appreciated your post, I'm surprised they got one forecast right. I didn't know.

Well I think it is QUITE actionable. The moral of the story is NOT to jump all over GMO and Mr. Granthem, but to reinforce for those who need it (and based on posts I see everyday on this site folks still need it) that active management is a losers game.

Good luck.

What I see every day is the belief that passive management is some sort of panacea. It is not, unless you believe being down 40% when your active friends are down 42% is some sort of consolation. If passive investing helps you sleep better at night, who am I to say otherwise, but it doesn't solve the "big one."

The idea of passive investing is based on the literature. If you believe in active management it is reasonable to assume the better you are the more money you will attract, no? So if that is true then why did the BHB and BSB studies show the top 100 pension funds drew NEGATIVE returns based on their active management? So either you believe your skill is greater then those active managers (I doubt), you think the methodology is incorrect in those studies (no evidence put out thus far on that one), or somehow it is different now (no evidence on that one). Heck the data is pretty consistent way back to Jensen article in the early 1930's.

The point being active management is overall a losers game as the majority. Are there that destroy the passive investor. Absolute. Just let me know how to identify them in advance so I can avoid the MAJORITY of losers. Looking at dollar weighted retuns vs. time weighted it seems many of these funds that do outperform are done when they are small and worse do poor going forward when they start attracting money due to being successful.

In your example, I don't care what active management performs in up OR down years. Heck, I don't care what my passive investment are doing in an up OR down year. All I care about is if my fund choices are doing what they are supposed to be doing and that is tracking the benchmark with the least amount of frictional cost (ER, turnover, etc..).

The question with active management is you may end up having MANY under performing years for no reason due to the addition an uncompensated manager risk. Passive investing eliminates that. Passive investing is a way of eliminating an uncompensated risk factor and that is manager risk.

Good luck.

[gmaynardkrebs]

So what is the point of your post? You say their forecasts are worse than the toss of a coin. One was, one wasn't. I'm not sure what you are trying to prove. Is there any actionable item from your post?

No there isn't, this thread is just food for thought.
Anyway I appreciated your post, I'm surprised they got one forecast right. I didn't know.

Well I think it is QUITE actionable. The moral of the story is NOT to jump all over GMO and Mr. Granthem, but to reinforce for those who need it (and based on posts I see everyday on this site folks still need it) that active management is a losers game.

Good luck.

What I see every day is the belief that passive management is some sort of panacea. It is not, unless you believe being down 40% when your active friends are down 42% is some sort of consolation. If passive investing helps you sleep better at night, who am I to say otherwise, but it doesn't solve the "big one."

The idea of passive investing is based on the literature. If you believe in active management it is reasonable to assume the better you are the more money you will attract, no? So if that is true then why did the BHB and BSB studies show the top 100 pension funds drew NEGATIVE returns based on their active management? So either you believe your skill is greater then those active managers (I doubt), you think the methodology is incorrect in those studies (no evidence put out thus far on that one), or somehow it is different now (no evidence on that one). Heck the data is pretty consistent way back to Jensen article in the early 1930's.

The point being active management is overall a losers game as the majority. Are there that destroy the passive investor. Absolute. Just let me know how to identify them in advance so I can avoid the MAJORITY of losers. Looking at dollar weighted retuns vs. time weighted it seems many of these funds that do outperform are done when they are small and worse do poor going forward when they start attracting money due to being successful.

In your example, I don't care what active management performs in up OR down years. Heck, I don't care what my passive investment are doing in an up OR down year. All I care about is if my fund choices are doing what they are supposed to be doing and that is tracking the benchmark with the least amount of frictional cost (ER, turnover, etc..).

The question with active management is you may end up having MANY under performing years for no reason due to the addition an uncompensated manager risk. Passive investing eliminates that. Passive investing is a way of eliminating an uncompensated risk factor and that is manager risk.

Good luck.

I was taking exception to the term "loser's game," because it implies, for many people, if not you personally, that passive investing is some kind of great "winner's game." It simply is not. While passive investing on average always beats active investing on average, it "wins" by very little -- basically fees. That means that when passive investing wins big time, so on average, does active investing, but by a little less. On the other hand, when passive investing loses big time, active investing does too, not by a lot more, but a little more. More importantly, I think there are times, when market valuations seem extremely high, where passively "staying the course" may be extremely hazardous to your wealth. I happen to believe that now is one such time, which is why I have "actively" scaled back my equity holdings beyond normal re-balancing..

Good luck to you as well, of course. We are all in this together.

[grayfox]

- ref: https://pensionpartners.com/the-next-7-years/

They basically got 3 forecasts (emerging bond, us bonds and tips) out of 11.

Now I better understand Bogle's words about forecasters like Rob Arnott. When they asked him "How do you sum up your feelings about Rob Arnott?" - he replied: "I wish I was as sure of anything as he is of everything"
- https://vimeo.com/241479867/description minute 40

I found a GMO forecast from 2011. It shows these error bars:

US Large +/- 6.5 OUT
US High Quality +/- 6.0 OUT
US Small +/- 7.0 OUT
Intl Small +/- 7.0 IN
Intl Large +/- 6.5 IN
Emerging Markets +/- 10.5 IN

Emerging Debt +/- 8.5 IN
US Bonds +/- 4.0 IN
Index Linked Bonds +/- 1.5 IN
Cash +/- 1.5 IN
Intl Bonds +/- 4.0 IN
Timber +/- 5.5 UNKNOWN

So they actually got 8/11 inside their prediction interval.
3/11 were outside their prediction interval. They missed on all the U.S. stocks.
72% success rate. Much better than a coin flip.

The problem is that everyone ignores the error bars.

[Whakamole]

I found a GMO forecast from 2011. It shows these error bars:

US Large +/- 6.5 OUT
US High Quality +/- 6.0 OUT
US Small +/- 7.0 OUT
Intl Small +/- 7.0 IN
Intl Large +/- 6.5 IN
Emerging Markets +/- 10.5 IN

Emerging Debt +/- 8.5 IN
US Bonds +/- 4.0 IN
Index Linked Bonds +/- 1.5 IN
Cash +/- 1.5 IN
Intl Bonds +/- 4.0 IN
Timber +/- 5.5 UNKNOWN

So they actually got 8/11 inside their prediction interval.
3/11 were outside their prediction interval. They missed on all the U.S. stocks.
72% success rate. Much better than a coin flip.

The problem is that everyone ignores the error bars.

Just to clarify my understanding, the 10.5 error bar for EM means that there could have been an annual return over the 7 year period of anywhere from -2.9% to 18.1% and this would have been counted as a correct prediction?

[david1082b]

"My predictions are mostly accurate because I have these huge error bars that allow almost any eventuality to get accounted for." :moneybag :moneybag

[grayfox]

Just to clarify my understanding, the 10.5 error bar for EM means that there could have been an annual return over the 7 year period of anywhere from -2.9% to 18.1% and this would have been counted as a correct prediction?

Right. GMOs assertion was that, at the end of the 7 year period, the actual return of EM would fall within the range -2.9% to 18.1%.
The actual return turned out to be 0.7%, which is within the prediction interval. Their assertion was correct: SUCCESS.

But for US High Quality, the interval was 7.1 +/-6.0 = 1.1 to 13.1.
The actual return was 13.2, outside the interval, FAIL.

The problem is not with GMOs Forecast, but with people's expectations. A lot of people confuse forecasting with fortune telling. They think that someone has the ability "to see the future" and tell them what's going to happen. Not possible. No one has a crystal ball.

[Carol88888]

I remember seeing Jeremy Grantham at the beginning of the year on Consuelo Mack's "Wealth Track" and he was advising putting 50% - yes 50%! - into emerging markets. He said that was what he had done for his daughter and family.

Well, didn't turn out so well. Still, it may look smart in a few years. Or not. Who knows?

I used to to listen to people like Soros and Dalio and other hedge fund managers until I realized that they are wrong as often as they are right and if they were really sure of something they wouldn't be telling me.

[ryman554]

No there isn't, this thread is just food for thought.
Anyway I appreciated your post, I'm surprised they got one forecast right. I didn't know.

Well I think it is QUITE actionable. The moral of the story is NOT to jump all over GMO and Mr. Granthem, but to reinforce for those who need it (and based on posts I see everyday on this site folks still need it) that active management is a losers game.

Good luck.

What I see every day is the belief that passive management is some sort of panacea. It is not, unless you believe being down 40% when your active friends are down 42% is some sort of consolation. If passive investing helps you sleep better at night, who am I to say otherwise, but it doesn't solve the "big one."

The idea of passive investing is based on the literature. If you believe in active management it is reasonable to assume the better you are the more money you will attract, no? So if that is true then why did the BHB and BSB studies show the top 100 pension funds drew NEGATIVE returns based on their active management? So either you believe your skill is greater then those active managers (I doubt), you think the methodology is incorrect in those studies (no evidence put out thus far on that one), or somehow it is different now (no evidence on that one). Heck the data is pretty consistent way back to Jensen article in the early 1930's.

The point being active management is overall a losers game as the majority. Are there that destroy the passive investor. Absolute. Just let me know how to identify them in advance so I can avoid the MAJORITY of losers. Looking at dollar weighted retuns vs. time weighted it seems many of these funds that do outperform are done when they are small and worse do poor going forward when they start attracting money due to being successful.

In your example, I don't care what active management performs in up OR down years. Heck, I don't care what my passive investment are doing in an up OR down year. All I care about is if my fund choices are doing what they are supposed to be doing and that is tracking the benchmark with the least amount of frictional cost (ER, turnover, etc..).

The question with active management is you may end up having MANY under performing years for no reason due to the addition an uncompensated manager risk. Passive investing eliminates that. Passive investing is a way of eliminating an uncompensated risk factor and that is manager risk.

Good luck.

I was taking exception to the term "loser's game," because it implies, for many people, if not you personally, that passive investing is some kind of great "winner's game." It simply is not. While passive investing on average always beats active investing on average, it "wins" by very little -- basically fees. That means that when passive investing wins big time, so on average, does active investing, but by a little less. On the other hand, when passive investing loses big time, active investing does too, not by a lot more, but a little more. More importantly, I think there are times, when market valuations seem extremely high, where passively "staying the course" may be extremely hazardous to your wealth. I happen to believe that now is one such time, which is why I have "actively" scaled back my equity holdings beyond normal re-balancing..

Good luck to you as well, of course. We are all in this together.

Except the small amount isn't small.

Assuming a 1% difference in fees, the 7% return over 30 years vs. a 6% results in a 32% difference in gains. (It really doesn't matter what returns are assumed, it's the 1% that matters)

YMMV, of course, and active may over perform relative to their passive cousins, but make sure to compound the small number over time.

[InvestInPasta]

I found a GMO forecast from 2011. It shows these error bars:

US Large +/- 6.5 OUT
US High Quality +/- 6.0 OUT
US Small +/- 7.0 OUT
Intl Small +/- 7.0 IN
Intl Large +/- 6.5 IN
Emerging Markets +/- 10.5 IN

Emerging Debt +/- 8.5 IN
US Bonds +/- 4.0 IN
Index Linked Bonds +/- 1.5 IN
Cash +/- 1.5 IN
Intl Bonds +/- 4.0 IN
Timber +/- 5.5 UNKNOWN

So they actually got 8/11 inside their prediction interval.
3/11 were outside their prediction interval. They missed on all the U.S. stocks.
72% success rate. Much better than a coin flip.

The problem is that everyone ignores the error bars.

Good to know, IMHO a forecast with error bars like the ones he provided is not actionable at all in the first place, and I would say it's also ridiculous because those error bars are too far away from the expected target.

Anyone can make a forecast in this way:
my target expected return in 7 years for the S&P500 is a +3% yearly..
...within an error bar of +-20% yearly.

Would anyone take my forecast seriously?

It's like if I tell you that tomorrow is going to rain, with an error bar that goes from extreme drought to a tornado.

[Whakamole]

Just to clarify my understanding, the 10.5 error bar for EM means that there could have been an annual return over the 7 year period of anywhere from -2.9% to 18.1% and this would have been counted as a correct prediction?

Right. GMOs assertion was that, at the end of the 7 year period, the actual return of EM would fall within the range -2.9% to 18.1%.
The actual return turned out to be 0.7%, which is within the prediction interval. Their assertion was correct: SUCCESS.

But for US High Quality, the interval was 7.1 +/-6.0 = 1.1 to 13.1.
The actual return was 13.2, outside the interval, FAIL.

The problem is not with GMOs Forecast, but with people's expectations. A lot of people confuse forecasting with fortune telling. They think that someone has the ability "to see the future" and tell them what's going to happen. Not possible. No one has a crystal ball.

It seems like it was a problem with the forecast, though. If the error bar was 6.1 instead of 6.0, it would have been a "success."

[gmaynardkrebs]

Well I think it is QUITE actionable. The moral of the story is NOT to jump all over GMO and Mr. Granthem, but to reinforce for those who need it (and based on posts I see everyday on this site folks still need it) that active management is a losers game.

Good luck.

What I see every day is the belief that passive management is some sort of panacea. It is not, unless you believe being down 40% when your active friends are down 42% is some sort of consolation. If passive investing helps you sleep better at night, who am I to say otherwise, but it doesn't solve the "big one."

The idea of passive investing is based on the literature. If you believe in active management it is reasonable to assume the better you are the more money you will attract, no? So if that is true then why did the BHB and BSB studies show the top 100 pension funds drew NEGATIVE returns based on their active management? So either you believe your skill is greater then those active managers (I doubt), you think the methodology is incorrect in those studies (no evidence put out thus far on that one), or somehow it is different now (no evidence on that one). Heck the data is pretty consistent way back to Jensen article in the early 1930's.

The point being active management is overall a losers game as the majority. Are there that destroy the passive investor. Absolute. Just let me know how to identify them in advance so I can avoid the MAJORITY of losers. Looking at dollar weighted retuns vs. time weighted it seems many of these funds that do outperform are done when they are small and worse do poor going forward when they start attracting money due to being successful.

In your example, I don't care what active management performs in up OR down years. Heck, I don't care what my passive investment are doing in an up OR down year. All I care about is if my fund choices are doing what they are supposed to be doing and that is tracking the benchmark with the least amount of frictional cost (ER, turnover, etc..).

The question with active management is you may end up having MANY under performing years for no reason due to the addition an uncompensated manager risk. Passive investing eliminates that. Passive investing is a way of eliminating an uncompensated risk factor and that is manager risk.

Good luck.

I was taking exception to the term "loser's game," because it implies, for many people, if not you personally, that passive investing is some kind of great "winner's game." It simply is not. While passive investing on average always beats active investing on average, it "wins" by very little -- basically fees. That means that when passive investing wins big time, so on average, does active investing, but by a little less. On the other hand, when passive investing loses big time, active investing does too, not by a lot more, but a little more. More importantly, I think there are times, when market valuations seem extremely high, where passively "staying the course" may be extremely hazardous to your wealth. I happen to believe that now is one such time, which is why I have "actively" scaled back my equity holdings beyond normal re-balancing..

Good luck to you as well, of course. We are all in this together.

Except the small amount isn't small.

Assuming a 1% difference in fees, the 7% return over 30 years vs. a 6% results in a 32% difference in gains. (It really doesn't matter what returns are assumed, it's the 1% that matters)

YMMV, of course, and active may over perform relative to their passive cousins, but make sure to compound the small number over time.

Sure, and for the reasons you say, I am a passive investor 90% of the time, mostly with Vanguard due to their low fees. However, I've "actively" cut back my equity allocation since last year, because I think at today's valuations, the rewards for risk are not appealing to me. What I put the money into are passive bond funds, so in that sense, I'm still playing by the BH philosophy. But I'm not following the "never time the market, always stay the course" branch. That's too doctrinaire for me, and just doesn't make sense -- to me.

[ryman554]

Sure, and for the reasons you say, I am a passive investor 90% of the time, mostly with Vanguard due to their low fees. However, I've "actively" cut back my equity allocation since last year, because I think at today's valuations, the rewards for risk are not appealing to me. What I put the money into are passive bond funds, so in that sense, I'm still playing by the BH philosophy. But I'm not following the "never time the market, always stay the course" branch. That's too doctrinaire for me, and just doesn't make sense -- to me.

Yeah, I understand the sentiment, which is why I rebalance, but don't move my AA. I get the desire to sell high and take money off the table. It's probably a good bet (I'm looking to move much of my $$ into my mortgage for just this reason -- lock in the gains)

I will caution that my father did the same. In 2011-2012. I recall the same thing -- valuations are high, gotta go down. Cost him $1M. That being said, anecdotes of outcome do not a good strategy make. If you're good at getting out and in at the right time, your strategy is the proper one. If not, you'll end up losing. Be careful out there.

[gmaynardkrebs]

Sure, and for the reasons you say, I am a passive investor 90% of the time, mostly with Vanguard due to their low fees. However, I've "actively" cut back my equity allocation since last year, because I think at today's valuations, the rewards for risk are not appealing to me. What I put the money into are passive bond funds, so in that sense, I'm still playing by the BH philosophy. But I'm not following the "never time the market, always stay the course" branch. That's too doctrinaire for me, and just doesn't make sense -- to me.

Yeah, I understand the sentiment, which is why I rebalance, but don't move my AA. I get the desire to sell high and take money off the table. It's probably a good bet (I'm looking to move much of my $$ into my mortgage for just this reason -- lock in the gains)

I will caution that my father did the same. In 2011-2012. I recall the same thing -- valuations are high, gotta go down. Cost him $1M. That being said, anecdotes of outcome do not a good strategy make. If you're good at getting out and in at the right time, your strategy is the proper one. If not, you'll end up losing. Be careful out there.

I agree. Thinking more about it, I have an asymmetric approach. I would never depart from "stay the course" when markets are down. That's a fools game, because fear is such a primal emotion, that it tends to rule almost entirely. Stay the course prevented me from doing many stupid things in 2008. A year or two from now, I might feel like I was an idiot to substantially lower my equity allocation now, but at least I won't feel like I was a panicked idiot.