Monday, January 4, 2021

2020 Prediction Contest Results

The 2020 prediction contest events have been scored, and the results are in. We had nine participants this year, and the results are as follows:

You can tell which predictions made the contest results by which ones had the highest standard deviation of probability percentage going into the contest: whether TSLA would go below $200 (pre-split), whether the Boeing 737 would return to service (it did), whether 2020 vehicle sales would decline, and so forth.

This may be the last prediction contest, or at least we may take a break from having a 2021 contest. 

For the contest itself was really a multi-year experiment in the folly of prediction. The year 2020 illustrated that for us perfectly. No one ever thought to include a pandemic, or lockdowns, or riots and curfews in hundreds of cities, or burned down police stations as potential events.

And what probability would anyone have given, one year ago, to this event: "The S&P 500 will hit an all time high during a week when passenger air travel (as measured by TSA checkpoint throughput) is down 75%"? Or how about this event, what probability: "Elon Musk will become the second richest person in the world, without demonstrating a new battery technology, establishing level 5 autonomous driving, or even selling more than half the units of Ford's F-series of trucks"?

The winners of the contest are never the same from year to year. The one constant is that the overconfident do poorly. Having extremely confident predictions (e.g. 90% or 10%) on any event that is contentious among participants (has a high standard deviation) is associated with poor performance in the contest. The better performing contestants seem to have an easier time intuitively feeling the range of outcomes that a trip through life's quincunx can deliver.

What seems to happen specifically is that a very rigid set of expectations, a very definite view, a simple narrative, crashes on the rocks of reality. In fact, I am learning to avoid any kind of simple narrative for thinking about the future. Consider predictions such as, "there's going to be hyperinflation / a crash / a civil war" next year. Reality is a lot more complicated. Bitcoin hit an all time high and oil hit an all time low in 2020. What probability would anyone have given that? And does it fit a simple label like "hyperinflation"?

Since we can't predict, what can we do? The only investing strategy that I can think of for coping with the utter impossibility of prediction is diversification among that which is cheap.

Previously, the 2015, 2016, and 2017, 2018, and 2019 prediction contest results.


Stagflationary Mark said...

Congrats to the winners!

The one constant is that the overconfident do poorly.

Indeed. I’ll simply repeat something that I recently posted on my blog.

Setting expectations below what is likely means life is often filled with pleasant surprises.

You know that I was a TIPS bull, but never in my wildest dreams and/or nightmares did I ever expect to see the real yield on the one 30-year TIPS bond filling my retirement account actually turn negative. 30 future years of nothing-burger? Seriously? I guess that’s my 99% overconfidence at play. Never saw it coming. Fortunately, it worked in my favor. What a pleasant surprise when I sold it to the next person earlier this year.

Or is that actually 99% under-confidence? I rarely feel that confident about any of my investments. That’s why I wanted to own the bond in the first place. I expected to hold it to maturity and not rely on someone else (a greater fool) to ever buy it. It had value to me, and that’s all that mattered.

In any event, a lack of investment confidence is not the worst trait to have in retirement. Well, assuming one doesn’t just hand over their money to Fisher Investments based on TV ads claiming that their fee structures are designed for them to do well when you do well. That’s just another way of saying that they’ll be taking a portion of your assets every year. In a potentially very low real return world, that might end up being all of your profits. And then some!

Beware investments that come with Hollywood level production quality brochures. They are designed to increase confidence. And as you say, the one constant is that the overconfident do poorly.

CP said...

Thanks Mark.

Curious about your all-in bet on utilities.

Why not utilities and some other out of favor sectors too?

Stagflationary Mark said...


Why not utilities and some other out of favor sectors too?

Valid question. Totally valid.

1. I tried consumer staples earlier this year and I just wan’t sleeping as well as I would have liked. I’m a cowardly insomniac, so sleep quality is very important to me. Although utilities have already been a wild ride since I bought in, it hasn’t affected my sleep at all. Could be case of ignorance is bliss, of course. One never knows for sure what one doesn’t know.
2. If I couldn’t sleep with consumer staples, then airlines, hotels, cruise ships, movie theaters, and department stores are right out. Unlike utilities, it’s been years since I’ve used the services of any of them. I mention department stores as a cringe-worthy inside half-joke, for your amusement. I know that’s not one of the out of favor sectors you were thinking of. ;)
3. I believe the theory that utility stock performance is very tied to interest rates (lower is better). There’s been a disconnect in the short-term, due to the pandemic hurting utilities. Although I could definitely see interest rates rise in the short-term, I also believe in the Japan scenario long-term. I continue to want to “bet” on that outcome, but with some protection in case I’m wrong. (Buying a 30-year treasury without inflation protection offers no protection at all if I’m wrong.)
4. The vast majority of my investments are not in the stock market. If they were, I would definitely diversify more.
5. Hubris? I believe in utility stocks over the long-term. I don’t have any delusions that they will outperform the stock market overall, but I do feel confident they will outperform the 1.64% 30-year treasury (which is currently 1.78%). Perhaps too confident? It’s also possible that utilities outperform treasuries, but only because both do very poorly.

Maybe utility stock hubris is allowing me to sleep at night? I hope not, but can’t rule it out. It’s almost the same feeling I have/had with owning long-term TIPS. It’s not the exact same feeling though. There are far more uncertainties owning utility stocks and someday I will need to find a greater fool to buy them from me. Utility stocks never mature.

In a perfect world, momentum investors will continue to shun utilities over the next decade as I reinvest their dividends. One can hope. Go Tesla! Go bitcoin!

Anonymous said...

Stag Mark, So hope to have found you again.

Stagflationary Mark said...


Nothing like a crisis to bring the old gang back together!

I will never forget 2020. It was the year that I played the board game Pandemic: Hot Zone North America with my girlfriend during an actual North American pandemic. Wish I was joking.

It’s not too late to add it to your bucket list for 2021, lol. Sigh.

bjdubbs said...

Thanks for hosting the contest. I tried to game it by putting in some really low figures on a couple of low-probability events but it looks like the logarithmic scoring did its job.

CP said...

Contest can't be gamed!


Thanks for playing.