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Stay away from wild predictions.

January 9, 2012

Even though Meredith Whitney was wrong on the muni bonds she is still married to financial advisor/professional wrestler JBL

With the playoff victory over the Steelers this past Sunday, I got to thinking about one of the most famous playoff victories of all time in Superbowl III.

Superbowl III featured the New York Jets versus the Baltimore Colts. In the game, the Colts were the favored team, but the Jets had Joe Namath as their quarterback. Three days before the game, Namath made the news by predicting the Jets were going to win. When the Jets won the game, the quote and Namath were famous.

We love wild predictions that come true. When someone says something outrageous and it happens, we, as a society, are ready to believe whatever the person says. This is true in the financial markets also.

One of the better predictions made in the past five years came from banking analyst Meredith Whitney, whose rise to prominence came from a very pessimistic yet accurate report about banking giant Citibank. Whitney was able to realize that the nation’s major financial institutions were in trouble before most analysts.

When the financial crisis hit in 2008, her pessimistic predictions held true and she was considered a financial genius. “Forbes” magazine ranked her as one of the best stock pickers in the country. She was named one of the 50 most powerful women in business and won CNBC’s Power Player of the Year over major CEOs and government officials.

Based on this major correct prediction, if Whitney said something, it moved markets. One of her next bold predictions came in a “60 Minutes” interview in December 2010 when she said we will see 50 to 100 sizable defaults on municipal bonds in 2011. Immediately following this, many people pulled out the money they had invested in municipal bonds.

This prediction, however, was completely wrong. There were fewer than a dozen municipal bankruptcies this past year, and municipal bonds earned investors about 10 percent, which was the best performance of any asset in the fixed-income markets for 2011.

Unfortunately, when someone makes a bold prediction and it comes true, it is all over the media. People love them. There is not a lot of follow up to bold predictions that are incorrect.

Truth is, bold predictions are incorrect most of the time. Even though Namath was right about the Superbowl, almost weekly there are athletic predictions of a win that are incorrect.

Be wary about extreme predictions. Even if the person was right before, chances are that he or she had 10 extreme predictions that did not happen. You can’t take the one correct prediction to mean increased accuracy for the future.

Be careful with people who give extreme predictions on what to do with your money. They have a small percentage chance of being correct and making you a lot of money, but they have a large chance of being incorrect and costing you money.

When it comes to making choices about your money, do your own research. Look at some of the mild predictions, which tend to be more correct. Look for predictions that are similar among people with different interests. Look at the long-term trends about what investments tend to hold up over time.

It is easy to get suckered into believing something wild. Whether it is an extreme sports prediction, stock prediction, or end date for civilization, there is something about wild predictions that draw us. Just don’t get drawn in too much.

Educate yourself and practice a little moderation in your investments. Just because Joe Namath accurately predicted Super Bowl III, don’t bet the house on his winner for this weekend’s Broncos vs. Patriots game.

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