Howard Marks on why forecasts are rarely helpful for investors

Famed investor and Oaktree Capital founder Howard Marks has argued that making and relying on macroeconomic forecasts remains a difficult task as he elucidated his reasons to avoid them.

“The problem is that I don’t think there can be a process capable of consistently turning the large number of variables associated with economies and financial markets (the inputs) into a useful macro forecast (the output),” Marks said in a memo.

Citing the failure of many forecasters to predict the US economy’s rampant recovery from the depths of the COVID-19 pandemic and the subsequent bull market in stocks, Marks said it was yet another example of why a model simply can’t replicate something as complex as an economy.

Marks argued that the unpredictability of economic participants is another reason why economic forecasts don’t always work. “And if the participants’ behaviour is unpredictable, how can the workings of an economy be modelled?” he questioned.

For the ace investor, the nuances and behaviour of people cannot be accurately quantified by mathematical models and he questions whether outputs of such predictive models can ever be trusted.

“Thus, for me, the bottom line is that the output from a model may point in the right direction much of the time, when the assumptions aren’t violated.  But it can’t always be accurate, especially at critical moments such as inflection points . . . and that’s when accurate predictions would be most valuable,” Marks said.

e Marks added that he has rarely met a successful “macro investor”, who he believes are the “exceptions that prove the rule”. The rule in this case is that macro forecasts rarely lead to exceptional performance.

“For me, the exceptionalness of the success stories proves the general truth of that assertion,” Marks said.

Marks cites Warren Buffett’s example of how investors can be successful by shunning macroeconomic forecasting and instead focus on gaining more knowledge than others on the “micro”: companies, industries and securities.

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