A Guide to Making 2015 Financial Predictions.

We have started to see and hear the first glimmers of the 'calls for 2015', with Goldman kicking off the season.  I would imagine that various other institutions and departments have been asked to start preparing their top trades and financial calls, so here is a somewhat cynical guide to the whole process with some top tips for practitioners.

WHY

First, there is absolutely no point in this process because who said an exact year, with no positional adjustment during it,  is the way anyone trades these days? If it were then the financial internet, press and even markets or exchanges would not have to exist between Jan 2nd and Dec 1st. Perhaps that's a good idea?

This process is much more like a yacht show where forecasting agencies can show off their shiny products of intricate design and process, wrap them with a glitz of gravitas and sell you a dream that you can sail off into 2015 aboard. If it doesn’t hit any rocks and sink then they hope you will be back to buy a bigger one next year.

HOW

The usual first rule of forecasting is never to put a price and time frame in the same forecast. For example ‘Oil will be over $100’ gives you an infinite time run within which to be right and 'Oil will be lower than here in 2015’ gives you a very high probability of being right unless you have unfortunately hit the absolute low at time of prediction.

With this in mind, make sure your predictions are not for where prices will be at the end of 2015, just somewhere during 2015. This leaves you with a year of optionality to either get out or take profit, GS style.

Only publish your exit trades way after the event. For example, you called oil down, oil went down until Jan10th then up for the rest of the year - You cut the winning trade on Jan 10th. Of course you did.

WHEN

If you have to publish before 2015 then don’t do so until Dec 31st. Doing so in November wastes a month of information to consider. Preferably publish your trades for 2015 in March 2015, or even later. The first few months of the year nearly always go the wrong way and you will have three months extra information to trade on. You also have the advantage of everyone else’s trades looking pretty stupid by then and investors looking for alternatives.

If you can, make the predictions for longer than 2015. Perhaps until 2020. This gives you an extra five years of optionality with regard to the above methods but also has two other advantages. First, you give off a greater air of authority having a six year view rather than a one year view. Second and more importantly, after five years everyone will have forgotten your predictions except you, so if they are wrong it doesn’t matter. If you are right, you can wave them around in success and write a best selling book and set up a large hedge fund doomed to lose all its assets.

WHAT

Of course what people actually care about is probabilities of outcomes and though I have often suggested that forecasters publish their own probability curves of price outcomes they still seem to stick with razor sharp defined price targets that, by definition, they are bound to miss. So best to put your 1 standard deviation range around a call. No one will mind and may prefer it. Either way it won’t matter but does give you a wider chance of success.

Write exactly the opposite of the GS forecasts. If framed under the conditions of the first point you will still have opportunity to get out at a profit at some point and if you can show a profit against GS your views will be spread wide and far and you will appear on Financial TV,  more because most people enjoy seeing GS look like a mug than your views being spectacularly right.

WHO

Pick eight prices you are going to call, they can be as varied as you like, calling long or short for each. Then set up 256 new forecasting identities. Using all the available permutations (2^8= 256) one of them is going to nail it exactly. This is who you now are. Wave this one around, write that book and set up that hedge fund.

WAFFLE

All forecasts are now couched in as many pages of declaimer as there are forecast. Why not embed a clause within it specifying that these forecasts cannot be maligned and if they are then the maligner will be liable to pay the forecaster $1m. If a Blackpool Hotel can try charging £100 surcharges for bad trip advisor reviews then why can’t you?

REPEAT

If all of the above is too complicated then just repeat the trade ideas that you put out last year, or if you are feeling very adventurous, just write down all the trades that worked during the previous year. It seems to be what most people do.