In October 1929, Irving Fisher was one of the most respected economists in America. A Yale professor, mathematician, and successful businessman, he had spent much of his career trying to understand how economies and markets worked. He had also become extraordinarily wealthy in the process.

And he was optimistic.

America was being transformed by electricity, automobiles, radio, and mass production. Corporate profits were growing, productivity was improving, and the stock market had experienced one of the greatest runs in its history. Fisher believed these changes justified permanently higher share prices.

On 15 October 1929, he uttered the words that would follow him for the rest of his life: stock prices had reached what looked like a “permanently high plateau”.

Less than two weeks later, Wall Street collapsed.

The decline did not end that month. It continued for years, eventually destroying much of Fisher’s personal fortune and turning one of the world’s most respected economists into the unfortunate owner of one of history’s most famous failed forecasts.

Not the Only One

There was also another forecaster.

Roger Babson had warned investors that a crash was coming. In September 1929, he told an audience that “a crash is coming, and it may be terrific”.

He was right.

There was only one problem.

Babson had also predicted crashes in 1926.

And 1927.

And 1928.

Those did not happen.

In 1929, he tried again.

This time history made him look like a genius. My guess is that if it did not happen, he would have predicted it again, in 1930.

And therein lies one of the great problems with forecasting: Being right is not necessarily evidence that you knew what was going to happen, any more than being wrong proves that your thinking was foolish.

What then, makes forecasting so attractive?

Confidence

Confidence is persuasive.

Economists and strategists regularly produce point forecasts – S&P 500 at 7 700, inflation at 4.4%, ten-year yield at 8.8% – when the underlying system contains enormous uncertainty, always. When market commentators say, "We are living in very uncertain times,” they are not stating new information. The future is always uncertain. We do not know the outcome of anything that is currently in process. But to utter that the market will do x within the next year reeks of confidence which people find attractive in this “uncertain world.

Part of the reason is skewed incentives.

Nobody gets invited onto television to say, “There is a wide distribution of possible outcomes, and I don’t have strong conviction about which will occur.” Certainty sells better than probability. Certainty feels safer than probability. Get the forecast wrong, everyone forgets in a week. Get it right, especially before a market crash, and you are a hero!

Third – and this is the big one: portfolio construction.

Forecasting is popular because uncertainty creates anxiety.

People do not necessarily want accurate forecasts. They want relief from anxiety that is created by this uncertainty.

There is a widespread belief that you must forecast before you can start building a portfolio.

Portfolio construction exists because uncertainty is permanent.

An investor does not need to know precisely what happens next.

The portfolio needs to survive several different versions of what happens next.

Forecasting asks: What will happen?

Investing asks: What happens to us if we are wrong?

That is a completely different way of approaching markets.

Good investment management isn’t about having a better crystal ball, it’s about building a portfolio that doesn’t require one.

The objective of investment management isn’t to build a portfolio that works if our forecast is right. It’s to build one that can still work when our forecast is wrong.

Forecasting is not bad, per se, and it will not go away. The lure to false certainty is understandable.

The right response to uncertainty should be well-thought-through portfolio construction rather than greater forecasting confidence.

Hannes Viljoen, CFA, CFP, is the founder and Head of Investments at Kudala Wealth. He manages portfolios and advises family offices and institutions on asset allocation, portfolio construction and long-term investment strategy