Posted By By Noah Solomon
Special to Financial Independence Hub
‘Cause I wanna be the minority
I don’t need your authority
Down with the moral majority
‘Cause I wanna be the minority
- Minority, by Green Day
I Stand Corrected
In past commentaries, I stated that (1) forecasting the future is next to impossible, and (2) it is therefore of no use when it comes to successful investing. After careful consideration, I acknowledge that there are exceptions to my first statement. I nonetheless maintain that forecasts, even to the extent they are accurate, are generally of no use when it comes to achieving better than average investment results.
Most people assume that accurate forecasting and outperformance go hand-in-hand. As such, my contention that accurate forecasts do not generally lead to outperformance seems paradoxical. This month, I will explain why, despite my change of heart when it comes to some peoples’ ability to forecast, I am holding steadfast to my belief that forecasting and investment results are fundamentally estranged.
Accuracy and Success are not Synonymous
There is a saying that if you are being chased by a bear, “You don’t have to run faster than the bear to get away. You just have to run faster than the person next to you.” With respect to forecasting, the ability to outperform doesn’t stem from making accurate predictions, but rather from making predictions that are more accurate than those of others.
Contrary to popular opinion, economic developments or corporate earnings do not move markets. Rather, it is only when such events come as a surprise that meaningful movements in asset prices occur.
Imagine a scenario where you position your portfolio based on a forecast for strong economic growth, low unemployment, declining inflation, and falling interest rates. If (1) your predictions turn out to be correct and (2) most market participants have the same view, your performance will be average. Your forecast would already be reflected in security prices, resulting in average performance.
Similarly, reactions to earnings announcements show that it’s not earnings per se, but rather earnings which come as a surprise (that differ from what the consensus was predicting) that cause meaningful movements in stocks. The stock price of a company that reports a doubling of earnings will not necessarily rise and may even decline. If most investors had predicted that the company would grow its earnings by less than 100%, the price of its shares would likely rise after its earnings announcement. However, had the consensus been for earnings growth of more than 100%, its stock would likely decline. Most likely (yes, the consensus is right most of the time), the majority would be expecting earnings to double, in which case there would be little if no post announcement movement in the company’s stock price.
The upshot is that even when forecasts are accurate, they generally don’t result in above average performance. It is only forecasts that both differ from consensus and are correct which result in superior performance.
Easier Said than Done
Just as being no faster or slower than the other person being chased by a bear does not guarantee your survival, accurate forecasts don’t lead to superior performance if the consensus forecast is similarly correct. Unfortunately, the other person being chased by the bear is damn fast! The consensus view is right most of the time.
If consensus forecasts are usually correct, then by definition contrarian ones are more often than not incorrect. Consequently, non-consensus and accuracy, the two forecasting characteristics required to achieve above average results, generally stand in opposition to each other. Pick your poison: either stick with the consensus and deliver average results or stray from the crowd and run a high risk of underperformance.
The Past is the Best Predictor of the Future … Until it Isn’t
Most forecasters are incrementalists: they use current conditions as a baseline and then make only minor adjustments depending on their respective views.
Things generally continue as they have been. Economic expansions and bull markets tend to last several years. Years in which stocks rise tend to be followed by further gains in the following year. Given this pattern, incremental forecasting tends to work most of the time.
The minority of occasions when consensus forecasts fail — which are also when non-consensus forecasts can add the most value — tend to happen during major turning points in markets, which are the exception rather than the rule. Not only are such sea changes extremely difficult to predict, but they are also hard to act on.
There’s no Point in Explaining to Someone who doesn’t Want to Listen
During the late 1990s tech bubble, most investors were convinced (or convinced themselves) that markets were experiencing the dawn of a new era abounding with limitless possibilities. A “no price is too high” mentality permeated the masses’ minds, causing tech stocks to rise at a parabolic rate and reach unsustainable valuations. Similarly, by the mid 2000s, the consensus view was that real estate was a bulletproof investment which could only go up, causing home prices to become completely detached from fundamentals and leading to lending practices that were profoundly estranged from risk management.
Notwithstanding the bitter endings to these episodes, there were few forecasters at the time who were willing to take a sober and skeptical view of what was bordering on utter lunacy. Perhaps more importantly, few investors were willing to listen to those who did, dismissing them as being “tone deaf” to what was perceived as a new reality in which the old rules did not apply. When the party is in full swing, nobody wants to either be or listen to the naysayer warning of impending hangovers.
Being Right isn’t Enough: You need to be Right Soon
Forecasts that can produce outperformance not only necessitate accuracy and straying from the crowd at times when it is most difficult to do so but also require precise timing. It’s hard enough to predict inflection points in markets, but predicting the precise timing of such pivots is next to impossible.
Among the few lonely souls who saw trouble brewing in the late 90s tech bubble or the early 2000s real estate craze, most of them were devastatingly early. Both tech stocks and real estate continued to appreciate at a torrid pace after the few naysayers (who were largely ignored) began ringing alarm bells. Few contrarians had the resolve to stick with their views as prices continued to rise, even though their predictions were becoming more likely as valuations became increasingly unsustainable.
A correct insight which is too early can lead to losses, insolvency, or ridicule. As legendary investor Howard Marks stated, “Being too far ahead of your time is indistinguishable from being wrong.” Even John Paulson, who eventually made billions in profits by shorting the U.S. housing market in 2006, had to endure massive losses in 2007 before his bet paid off.
Career Risk & Safety in Numbers
In the world of forecasting, being wrong can be very detrimental, particularly with respect to one’s career and credibility.
Most forecasters got caught flat footed when markets began reeling in 2000 and 2008. However, they could take solace in the fact that they were in the majority, which provided them with sufficient cover. On the other hand, being wrong on a contrarian view can have devastating consequences. The asymmetric risk of differing from the crowd is best described by John Maynard Keynes’ observation:
“It is the long-term investor who will in practice come in for the most criticism. For it is the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of the average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
Those who Tell don’t Know. Those who Know don’t Tell
Cynically speaking, if someone had the ability to make accurate, non-consensus forecasts that could generate better than average performance, why on earth would they share them? Such skills could produce returns that would make Buffett look like a chump. Those with such prowess (who are rare to non-existent) would be far better off following their own advice rather than wasting their time convincing others to follow it!
Algorithmically Embracing the Unknown
At Outcome, our views on forecast-based investing are best summed up by H.L. Mencken’s assertion that “We are here and it is now. Further than that, all human knowledge is moonshine.”
We always have and continue to shun forecast-based investing, with which we believe neither we nor anyone else can add value. We will continue to apply our machine-learning based investment models to markets that are subject to behavioural biases and non-economic motivations to deliver outperformance over the long-term.
Of note, our approach to investing has consistently enabled the Outcome Canadian Equity Income Fund to mitigate losses and preserve capital in challenging markets, with last month being no exception. In March, the TSX Comp. Index declined 4.3%, while the S&P 500 Index fell 5.0%. In comparison, the Outcome Canadian Equity Income Fund rose 0.7%.
Noah Solomon is Chief Investment Officer for Outcome Metric Asset Management Limited Partnership. From 2008 to 2016, Noah was CEO and CIO of GenFund Management Inc. (formerly Genuity Fund Management), where he designed and managed data-driven, statistically-based equity funds.
Between 2002 and 2008, Noah was a proprietary trader in the equities division of Goldman Sachs, where he deployed the firm’s capital in several quantitatively-driven investment strategies. Prior to joining Goldman, Noah worked at Citibank and Lehman Brothers. Noah holds an MBA from the Wharton School of Business at the University of Pennsylvania, where he graduated as a Palmer Scholar (top 5% of graduating class). He also holds a BA from McGill University (magna cum laude).
Noah is frequently featured in the media including a regular column in the Financial Post and appearances on BNN. This blog originally appeared in the March 2026 Outcome newsletter and is republished on Findependence Hub with permission.
