Wednesday, January 9, 2013

Evaluating My 2012 Economic Predictions

To start the year I made some random economic predictions with confidence level zero. Keeping in mind that you should ignore all economic predictions whether they are mine or anyone else’s, let’s take a look at how well I throw darts blindfolded.

1. Interest rates will go up a little.

Fail. The Bank of Canada target rate stayed at 1% throughout 2012.

Score: -1

2. Housing prices will come down a little.

Fail. According to the Teranet - National Bank Composite House Price Index, as of November house prices had risen 3.46% so far this year. I’ll concede that it’s unlikely that December will wipe out all of those gains.

Score: -1

3. Canadian and U.S. stock markets will have an above average year.

Using XIU as a proxy for Canadian stocks, the 2012 return with dividends was 8.0%, or about 6.3% above inflation. I’m not sure I’d exactly call that an above-average year, but it seems acceptable.

Using VTI as a proxy for U.S. stocks, the return with dividends was 16.4%, or about 14.8% above inflation. This is definitely an above-average year.

Score: +0.75

4. Bonds will have a below average year.

Using XBB as a proxy for Canadian bonds, the 2012 return with dividends was 3.0%, or about 1.3% above inflation. This is only slightly below average. I’ll only take half a point on this one.

Score: 0.5

5. RIM won’t drop 75% again.

Success! RIM shares went from $14.80 to $11.80, a drop of only 20%. Of course, dropping 75% or more is quite unlikely, and I deserve little credit for this correct prediction.

Score: +0.01

6. Berkshire Hathaway will have a strong year.

Success! Berkshire A-class shares went from US$114,755 to US$134,060, an increase of 16.8%, or about 15% above inflation. Of course, Warren Buffett would measure the success of the year by Berkshire’s business performance rather than the movement in its stock price. But we’re talking about pointless predictions here and we might as well use a superficial measure of their success.

Score: +1

Total Score: +0.26 (out of a possible range of -6 to +6)

So, my overall score is extremely middling. Keeping in mind that a score of zero corresponds to a blindfolded monkey throwing darts, my predictions are nothing special. It’s a good thing that I made no concentrated bets on these predictions. You shouldn’t have either.

With a little luck, I could just as easily have made a bunch of predictions that all turned out to be right. But these would have been just as worthless as the predictions I did make because you can’t know in advance if I’m going to be right or not. And even if I get them right one year, I might be totally wrong the next year.


  1. Re prediction 1, give yourself credit! All but 10+yr Canada bond yields rose slightly in 2012 per this BOC page - Of course, the predicted variable is plural "rates", so I am taking the position that the required proof to be correct is not 100% across the board rise in every interest rate out there, just a majority.

    1. @CanadianInvestor: It's very tempting to look for an interpretation that makes my prediction look better. This would be fairly easy to do in this case because I wasn't very precise in writing up these predictions. However, in the case of the first prediction about interest rates, I specifically had in mind the Bank of Canada target rate. Since this rate couldn't really go any further down, I think I deserve to fail on this prediction.

  2. Prediction 2 is the biggest disappointment of the year, in my opinion. the indicators were there already, but then the real estate sector turned on its head and flipped us all by staying steady at a tough rate.

    1. @Jimmy: Reality has a habit of undermining our over-confidence. Maybe expert have a slight edge over the rest of us at predicting future real estate prices, but this is just a slight probabilistic edge. There is always a non-trivial probability that outcomes will be very different from expert predictions.