Blog - Investing Notes

January 24, 2007 - Update: A Weighted Guru Groupthink

Suppose we take the current intermediate-term (notionally 3-9 month) stock market outlooks of the experts covered in Guru Grades and weight these outlooks according to current calculated guru forecast accuracies. Would the current accuracy-weighted aggregate opinion be bullish or bearish? Here's an update on weighting guru stock market outlooks.

As background, the following chart shows the distribution of gurus according to the accuracy of their forecasts for overall stock market direction, with accuracies segmented into intervals of 5%. The average (equally-weighted) accuracy of all 38 tracked gurus is 50%. Given the small sample size, the underlying distribution may be normal, even though the empirical distribution is lumpy. The approach outlined below reflects weighting the outlooks of gurus on the right (left) side of the distribution positively (negatively), with the magnitude of the weighting increasing with distance from the center.

The weighted group outlook development method is:

1. Applying judgment, identify gurus with current intermediate-term outlooks. We find 29.
2. Assign +1, 0 or -1 to each of these 29 gurus for bullish, neutral and bearish outlooks, respectively.
3. Weight each guru's outlook by the factor [Guru's Accuracy - 50%]. If a guru's accuracy is above (below) 50%, the weighting factor is positive (negative). For example, a guru with a poor forecast accuracy of 36% would have a weighting factor of 36% - 50% = -14%. If that guru were bullish (bearish), his contribution to the overall outlook would be negative (positive).
4. Sum all of the weighted guru outlooks.
5. Normalize the result such that the maximum (minimum) possible group outlook based on current guru accuracies is 100% (-100%).

The output of these calculations is +37%, with a contribution of +17% from gurus with historical accuracies greater than 50% and +20% from gurus with historical accuracies less than 50%. (The more accurate subgroup is net bullish, and the less accurate subgroup is net bearish.)

For comparison, we weight the 29 gurus equally and find a net +7% outlook, quite a bit lower than the accuracy-weighted outlook and, in fact, close to neutral.

In summary, the accuracy-weighted intermediate-term group outlook of the gurus we track is bullish, with the more (less) accurate subgroup bullish (bearish).

For the initial measurement of guru groupthink, see our blog entry of 10/25/06. The groupthink outlook at that time was +31%.

For other research on sentiment indicators, see Blog Synthesis: Sentimental Journey.