Winning Without Predicting

John Osbon - January 12, 2011

Byron R. Wien, Vice Chairman, Blackstone Advisory Services, has one of the best prediction records in the business.  Over the last 25 years he has released his “10 Surprises” each January. Statistically, he has been right more than wrong.  The bonus is that is he humble and open-minded, so he is definitely worth reading to test one’s own investment assumptions and biases.

In 2011 Byron predicts, among other things, a strong 5% growth US economy, gold at 1600, the S&P 500 at 1500, and the 10-year Treasury near 5 percent. Sound right to you?  How would your portfolio do in that scenario?

Based on Byron’s track record, it may be tempting to stack one’s portfolio accordingly. But don’t be too hasty. In 2010, Byron predicted a flat S&P (it was up 15 percent), 10-year yields above 5.5 percent (actual was 3.3 percent), and a loss of less than 20 Democratic seats in Congress (60+). Betting on Byron last year could have been costly.

Predictions can be fun to make, thought-provoking to read, and enlightening to examine after the fact. But prediction is not portfolio management, it’s speculation.  Om Malik in Bloomberg Business Week talks about the “perils of the prediction game” in technology (what happened to MySpace?), foreign policy (is the US falling behind Japan?), and media (what’s ahead for Kindle?).

But if not prediction, then what? Try diversification, with the mix of asset classes based on your goals and appetite for risk. Add indexing to cut costs and control taxes.  Burton Malkiel, in his newest 10th Edition of A Random Walk Down Wall Street notes that investors are generally not diversified enough, especially internationally, due to “home country bias.”  Diversification may sound boring, but properly done it can reduce risk and raise return, without relying on the prediction of unknowable future events.

Is your portfolio a gamble?

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