Don't get me wrong. I think Jeremy Siegel is a very impressive guy. He is a Professor of Finance at the prestigious Wharton School at the University of Pennsylvania and the author of the well-reviewed book, Stocks for the Long Run. He is a frequent guest on national television where he comments on the market. He also writes a regular column for Yahoo Finance.
In his current Yahoo Finance column, Professor Siegel says "[I]t's time to dust off the proverbial crystal ball and predict what's in store for 2008." Before doing so, he does a review of his predictions for 2007 and gives himself pretty high marks.
After all, he notes, he got "a lot right despite missing the subprime crisis."
Wait a minute. You have the ability to forecast the direction of the markets ...but you missed the subprime crisis?
That's like the Lincoln family psychic predicting that the president would enjoy the performance of Our American Cousin and missing the guy with the single shot derringer.
Actually, it's worse.
Given his credentials, when Siegel makes predictions about the markets, it feeds the belief that there is someone who actually has this ability. This is simply not true.
One study looked at over 200 investment newsletters during a 12-year period. It found no evidence of any ability to predict the direction of the markets.
Countless other studies made the same findings. In one particularly compelling one, the results of 1,557 retail mutual funds and 210 institutional funds were examined. The author found no evidence of predictive powers by the fund managers. He cited an additional 41 studies that reached the same conclusion.
This overwhelming academic data has not discouraged self-styled financial gurus from making all kinds of predictions. Smartmoney.com has tracked these predictions since 1997.
How did these "experts" do?
They were wrong about 60 percent of the time.
The fact is Professor Siegel has no more ability to make predictions than you do. The problem is his academic standing may cause you to rely on his predictions.
Here is another prediction he made about interest rates on December 27, 2006:
"I believe that the Fed will hold interest rates at 5.25% for quite some time."
He noted that he was aware of contrary evidence, but he discounted it.
Reality proved otherwise.
The Fed cut interest rates three times in 2007, down to their current level of 4.25 percent.
Investors who relied on his contrary prediction could have been seriously harmed.
We all wish someone out there had some special insight into the unknown.
It is a disservice to investors when those who should know better foster this false hope.