Democracy and Investing (Part II)
Monday, August 20, 2007 | Wayne MulliganRating:
Good morning!I was on a short family vacation last week so I apologize for not replying to many of the comments you and other Tycoon readers left on last week’s article. But I have to say, after getting back Sunday morning and breaking down all the data I was ECSTATIC to see how many great responses we received!
We had roughly 47 people respond with stock price predictions. Since we asked for 3 predictions for 3 different stocks, that means Tycoon Report readers submitted about 423 individual stock predictions!
Give yourselves a round of applause - that was simply amazing!
Then we had to take all that data over here, pump it into an Excel spread sheet and find out the average price predictions.
But before I get into the results, I’d like to address a couple of comments that were left on the site.
One that stands out in particular was along the lines of “these people are simply taking wild guesses, I prefer to be more analytical.”
I don’t want to offend the person who left that comment, but let me say that you missed the point of the exercise.
For starters, nobody took a “wild guess”. A wild guess would’ve been predicting Microsoft’s stock price to hit $2.00 by the end of the month. A person making that prediction would’ve obviously had no knowledge of the market or Microsoft’s current stock price.
All of the “guesses” that were submitted to the site were tightly correlated to current stock prices and market conditions.
And I’m sure many of the “guesses” were more analytical than the “guessers” let on.
The point of the article wasn’t to say that a very large group of people throwing darts at a board could do better than a small group of analysts. It was to say that a large group of people that applied some level of common sense analysis could possibly outperform the so called “experts”.
Pick up the book I recommended if this is unclear (Wisdom of Crowds) – at the very least, you’ll get an interesting read out of it.
The other comment I wanted to address is this:
“Seems like the one advantage those farmers and yokels had was that they did not see the predictions of others as they came in. It was blind.”
I just wanted to say that I couldn’t agree more – we obviously have a crude system in place for our little experiment, but I think it was effective enough for our purposes.
But you’ve also pointed out one of the flaws in the stock market being used as a predictive tool: everybody sees what everyone else is doing. If a stock drops because a big fund just sold a large stake, others will take the price drop as a cue to sell as well (regardless of what the company’s fundamentals are saying) – it’s the basis for technical analysis. In the Wisdom of Crowds it’s known as an “information cascade.”
The other obvious flaw in our experiment is that it doesn’t take any “new information” into account. For instance, if a catastrophic economic event was to occur and the country plunged into a recession, these predictions would be way off base.
The solution to the “information cascade” problem is obvious – make it a blind submission process. “Guessers” would simply submit their guesses to a closed system and not see what others guessed until they were done.
I’m not sure what the answer to the last problem is, but I’d love to hear what any Tycoon Report readers might suggest ... how could we make this experiment more efficient at incorporating new information?
Allow people to change predictions every month?
Make the prediction times shorter – 1 week, 2 weeks, 3 weeks, etc.?
Put it out there and let’s discuss it – with all the big brains we have reading The Tycoon Report I’m sure we can come up with something!
Now onto the results ...
The Results
Microsoft (Nasdaq: MSFT)
The 1 month prediction is $30.06 – let’s check back on September 10th and see how everybody did.
The 6 month: $32.70. For this one we’ll check on Feb 11th, 2008 (I know it’s a ways off, but we’ll keep track over here for you).
1 Year: $35.49. And for the 1 year predictions we’ll obviously check back on August 13th, 2008!
Apple (Nasdaq: AAPL)
1 Month: $125.80
6 Months: $144.94
1 Year: $160.81
Google (Nasdaq: GOOG)
1 Month: $502.22
6 Months: $532.79
1 Year: $568.32
And there it is. I’m not going to comment or weigh in on any of these predictions; we’ll let the ticker tape tell us if we are onto something or not.
What do you think of the results? Click here to let us know.
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Wayne Mulligan
Contributing Editor
The Tycoon Report
Mark Your Economic Calendar: What's ahead for the week of August 20, 2007
Monday, August 20
10:00 - Leading Indicators (for July): Consensus 0.3%
Big Picture: Six monthly declines in 2006 reflect the weaker economy in late 2006 as declines were shown in 4 of the first 6 months of 2007. The 6 month growth is back in decline at -0.7%. Over the last 17 years the index correctly signaled the 1990 and 2001 recessions while providing a false signal during the 1995 soft-landing. The recession alarms go off when the cumulative 6 month decline exceeds -1% amid a string of three or more consecutive monthly declines. No recession warning bells yet and none expected.
Implications: The Leading Indicators report is, for the most part, a compendium of previously announced economic indicators: new orders, jobless claims, money supply, average workweek, building permits, and stock prices. Therefore, the report is extremely predictable and of very little interest to the market. Though this series does have some predictive qualities, it is a common criticism that it has predicted "nine of the last six" recessions.
Thursday, August 23
8:30 - Initial Claims (for 8/18): Consensus NA
Big Picture: Initial claims can be somewhat volatile, but the 4-week average has remained in a lower 300K to 320K range since topping 330K in mid April. Aberrations are watched for clues on the labor market and economy as the recent levels reflect an even tighter labor market. Continued claims are showing more lift than initial claims as the 4-week average nears the year and a half high of early March. Claims provide a nearly real time read on layoffs and the labor market as the low 4.6% unemployment reflects the broader read of layoffs and hiring.
Implications: Initial jobless claims measure the number of filings for state jobless benefits. This report provides a timely, but often misleading, indicator of the direction of the economy, with increases (decreases) in claims potential signaling slowing (accelerating) job growth. On a week-to-week basis, claims are quite volatile, and many analysts therefore track a four week moving average to get a better sense of the underlying trend. It typically takes a sustained move of at least 30K in claims to signal a meaningful change in job growth.
Friday, August 24
8:30 - Durable Orders (for July): Consensus 1.0%
Big Picture: Durable goods order growth has returned, shown by the four gains over the last 5 months. The stall tied to weak capital investment appears to be past, but risk remains given the recent market turmoil. Strong corporate balance sheets, high capacity use and rising exports remain strong underlying factors. The downward effects from autos and housing continues. Inventory downsizing added to the weak growth early in the year but is now past. Recently stronger manufacturing production and the annual high in the June ISM index show signs of improvement which Briefing.com expects to continue.
Implications: The durable orders release measures the dollar volume of orders, shipments, and unfilled orders of durable goods (defined as goods whose intended lifespan is three years or more). Orders are considered a leading indicator of manufacturing activity, and the market often moves on this report despite the volatility and large revisions that make it a less than perfect indicator. These problems can be minimized by looking at the breakdown of orders. The total number is often skewed by huge increases in aircraft and defense orders. An increase based solely on strength in one sector tends to be discounted, while the market is more impressed with broadbased increases in orders.
10:00 - New Home Sales (for July): Consensus 830K
Big Picture: New home sales reached a 7-year low in March and stands just 4K above that in June. The National Assoc of Realtors expects new home sales to trough in Q4, but revisions continue to move lower as the mortgage mess worsens. Prices have been swinging wildly as a -7% yoy decline in April compares to the 10% yoy rise in March. Inventories have fallen off the 8.3-month high in March. Still waiting for signs of improving demand for residential buying to provide a delayed lift to new construction given the large supply of unsold inventories.
Implications: The report indicates the level of new privately owned one-family houses sold and for sale. New home sales usually have a lagged reaction to changing mortgage rates. They also tend to be stronger early in the business cycle when pent-up demand is strong, and they fade later in the cycle as the demand for housing is sated. In addition to home sales, the market monitors the number of homes for sale relative to the current sales pace. As this inventory measure falls (rises), housing starts tend to rise (fall). Finally, the median home price provides an indication of inflation in the housing sector, though only year/year changes provide any meaningful information. The home sales report is quite volatile and subject to huge revisions, making any one month's reading very unreliable. The report rarely prompts a market reaction. The market prefers the existing home sales report, which has a sample data pool four times as large and is released earlier in the month.
Source: www.Briefing.com
