• In 1969 quarterback Joe Namath boldly guaranteed his underdog New York Jets would beat the Baltimore Colts to win the Super Bowl. An audacious prediction, when Namath successfully led his team to beat the Colts he ensured his place in sports history.
• In 1961 President Kennedy called for the nation to land a man on the moon and return him safely to Earth by the end of the decade. At the time an American hadn’t even orbited the Earth, let alone made it to the moon. Considering today it takes almost a decade just to design a new rocket, Kennedy’s call to action from virtually a blank sheet of paper was truly a “moon shot.”

• What was the name of the pastor who predicted the world would end on May 21, 2011? I can’t remember either. I’m sure I would remember had the world actually ended. (Well, maybe not, but you get my point.)
  
  
• In December 2007 sell-side equity strategist Abby Joseph Cohen predicted the S&P 500 would climb from 1,463 to reach 1,675 by the end of 2008. Given the brewing financial crisis, this was a bold call. In fact, the crisis dramatically worsened and the S&P 500 ended 2008 at 903. As the U.S. crisis recedes into memory, people have moved on.

• Global economic outlook. We believe investment managers can analyze numerous data sources on global economic activity and apply lessons learned from past economic cycles to make reasonable assessments for what the future is likely to hold. This is complicated by changing global dynamics and sometimes unpredictable politics. But a robust economic framework can yield real benefits for investors.
  
  
• Relative value among asset classes. Looking at the current prices of securities, such as P/E multiples, dividend yields and expected earnings growth for stocks, and spreads and yields for bonds, in the context of the current economic environment, managers can make reasonable judgments about the overall expected return from asset classes over the long term. From this perspective, managers can determine which asset classes they believe will provide the best risk-adjusted returns over time. Stress testing these assumptions against a range of economic environments is important.
• Outlook for an individual security, be it a stock or bond. Through rigorous bottom-up research, analyzing financial statements, meeting with management, speaking with suppliers, customers and competitors, we believe managers can develop an edge regarding the outlook for individual companies. We will often research a stock only to uncover no special view; we let a lot of pitches go by before we find a stock we like in which we believe we have found an edge.

However, innovation, business expansions and turnarounds take time. While investment managers may have confidence in a company’s growth plans, whether that expansion takes one quarter or one year to bear fruit can be hard to know. Hence, taking advantage of fundamental research often requires lengthy holding periods. We generally expect to hold stocks for three to five years.

• The level of the stock market on a particular date in the future. Stocks receive cash flows last in the capital structure, so any new information that can affect instruments senior to equities can also affect equities: Political events. Economic events. Interest rate moves. Industry dynamics. Management changes. Product innovation, etc.

Equity prices are continuously updating to reflect the constant stream of new information that could affect the stock. As described above, we believe we can get to know individual companies well through deep fundamental analysis. But the market as a whole is much better at aggregating all the information that could affect any of the thousands of companies in the stock market than any investor could possibly be. Think of an individual trying to compete against a supercomputer that is composed of an almost infinite number of microprocessors working in parallel crunching vast amounts of data as it pours in. The computer isn’t perfect and may not have wisdom, but it has a huge advantage over the analyst. In the short-term, equity markets contain the bulk of available information that should affect stocks.

As a result, predicting where the Dow will close on a given date is like trying to predict where ocean waves will splash against the Newport Beach pier at a given moment in time. While oceanographers can tell us the general time and average level of high and low tide, they know the natural dynamism of the sea limits their precision to forecasting trends and averages rather than point estimates. We believe the same is true for forecasting the stock market as a whole.