Doug Kass recently wrote about his “15 Surprises for 2012”. While a good read on its own, he also looked back to how 2011 sell side consensus projections stacked up vs. reality:
- 2011 U.S. real GDP up 3.4% (actual: up 1.8%), and global GDP up 4.7% (actual: up 3.8%);
- 2011 S&P 500 operating profits of $94 a share (actual: $97 a share);
- Year-end S&P 500 price target of 1450 (Friday, Dec. 23's actual close: 1265 & Dec 31st close was 1254);
- 2011 inflation (core CPI) of +0.5% (actual: +1.7%); and
- 2011 closing yield on the U.S.10-year Treasury note at 3.75% (actual: 2.03%).
Some pretty big misses there. Hopefully you didn’t make a big bet one way or the other based on consensus views. I think there are a few key takeaways:
- It is very hard to rely on the consensus views on whole to predict events that have a lower probability of taking place.
- Those events can have large impact on the economy and the markets.
- While each event on its own may have a low probability of happening, when taken together the chances of one of those rare events happening is probably pretty high.
- While not shown, the sell side analysts that make up the consensus tend to all have the same views. It doesn't pay to different, and the penalty for being wrong as an outlier is great.
- Taking the first 3 together, chances are something unexpected will happen so it’s best to make sure your portfolio is prepared accordingly, for example maybe like this.
