There’s one thing you can always count on from big banks: That they’ll get a lot of things very wrong – and overcomplicate things along the way.
For example (maybe not the most obvious one): Just look at their predictions for this year’s FIFA World Cup. (Yes, giant banks like Goldman Sachs use their time and energy to predict the World Cup winners.)
The image below shows which teams investment bank Goldman Sachs predicted would make it to the quarter finals, semi-finals and finals back on June 11 (before the World Cup started). The bank used four different types of machine learning AI models to predict the winners (more on that later).
As you can see, Goldman Sachs predicted that the quarter-final matches would be played between France and Spain, Brazil and Belgium, Portugal and Argentina, and Germany and England.
Then it believed France and Brazil and Portugal and Germany would battle it out in the semi-finals… before Brazil and Germany reached the finals. It ultimately has Brazil winning the cup.
But there’s just one big problem. Germany, the defending champion, never even made it to round 16. Meanwhile, Portugal, Argentina and Spain all lost their round 16 matches.
So of the eight teams Goldman Sachs predicted initially making it to the quarterfinals, only four remain – Brazil, France, Belgium and England.
Then, on June 25, Goldman Sachs came out with a new round of predictions, with France and Brazil, and Spain and England facing off in the semi-finals. Of course, Spain has since been eliminated.
Now, Brazil could still be the World Cup champions. But Goldman Sachs has been predicting Brazil’s victory for the last three World Cups. And it’s been wrong every time.
Relying on big banks for investment advice can also lead you astray.
Big money managers underperform
Just like with the World Cup, big banks often get it wrong when it comes to investing.
On the one side… There’s an entire industry dedicated to telling you what stocks you should buy. The main job of thousands of stock analysts in Singapore and Hong Kong – not to mention London and New York and other financial centres around the world – is to tell investors what stocks are a “buy” and a “sell”. Then there are many more brokers whose sole job is to relay to customers the smart things their analysts told them.
On Wednesday, October 18, 2017, Kim Iskyan received a cryptic email that could’ve turned every US$1,000 invested into US$35,980.
A few weeks later, another such email could’ve made you a 473 percent gain – enough to turn a US$1,000 investment into US$5,730.
Now gains like these are rare.
But right now, the same kind of opportunity is hinting at a potential five to 10x gain over the long term. Go here for the full story.
Then there’s the other side of the financial services industry – where fund managers invest the money that you’ve put into mutual funds or other managed products. Their selling point: based We’ll make you more money than you could on your own.
Part of this promise is that the clever fund manager will invest in securities that perform better than the market as a whole – that is (depending on your home market), better than the S&P 500, or the Hang Seng, or the STI in Singapore, and so on.
The problem is, the facts don’t really support this idea. Most of the time, fund managers don’t do better than the market. Countless studies have shown that the vast majority of managed funds underperform the indices that they’re supposed to be beating… across markets and across time horizons.
In short, big banks and asset managers often get it wrong. You’d do much better doing your own smart stock selection or just buying an index fund or exchange traded fund.
Why big banks get it wrong
Big banks get World Cup predictions and investment picks wrong in part because they overcomplicate things.
For example, here’s how Goldman Sachs explains its approach to predicting World Cup outcomes:
“…while selecting the best starting eleven requires human judgment and experience, choosing the best variables to predict the outcome of a game is better left to a statistical model. Or more precisely, 200,000 models: harnessing recent developments in ‘machine learning,’ we mine data on team characteristics and individual players to work out which factors help to predict match scores. This gives us a large number of forecasts, which are combined to produce an overall projection. We then simulate 1,000,000 possible evolutions of the tournament to gauge the probability of each team progressing through the rounds.”
And just look at a page from Goldman Sachs’ World Cup predictions report:
Instead of just focusing on which teams had the best players, or the national team’s record, or the experience of the coaching staff… the bank compared Japan’s FIFA ranking to the Nikkei Index. (As it happened, Japan did do better than expected, as predicted.)
Unfortunately, the finance industry – including brokers, analysts and bankers – have a vested interest in selling you shares of companies you may not understand. Sounding smart is how they help justify fat fees and commissions. They also count on the customer not feeling comfortable with saying, “I don’t understand.” These people sound like they know what they’re talking about. The reality, though, is that very few of them do.
So whether it’s picking who will be the World Cup champions – or manging your investment portfolio – follow your own judgment… and not that of big banks.
Publisher, Stansberry Churchouse Research