By Alan Steel
Winston Churchill said, “The farther back you can look, the farther forward you are likely to see.”
That’s a thought-provoking insight at a time when our addiction to instantaneous information seems inversely proportional to its value, and the nose on our faces is what usually determines the distance between our eyes and our i-Phones.
And it’s equally true in terms of perspective, where knee-jerk investment opinion is the most enticing (and marketable) currency. It drives swells of articles into inboxes, dropboxes and even postboxes (call me old school), replete with the facts that fit the headlines, and a caveat emptor on any predictive accuracy.
Case in point, research has found over and over again that the vast majority of economists have failed to predict recessions by more than a coin flip – a Wall Street Journal Survey of economist predictions going back to 1982, called that number at five misses out to 2005.
And they missed 2008/09 by a wide margin, so we’ll tally at six.
The lesson: Choose the coin over the economist’s view every time, or the flip could be: Heads you lose, and tails you might lose too.
In yesterday’s Isn’t It Ironic (Don’t You Think?), I said believe it or not even the US Federal Reserve, who are apparently in charge of the US economy, are below 30% accurate when predicting future US interest rates.
But despite all the evidence against doing so, our investment decisions still rely on expert or consensus thinking.
There’s a lot wrong with that, and if you need a further nudge you might want to take a backward glance at Steven Levitt’s book Freakonomics, from 2005.
He explores the hidden side of everything, challenges conventional wisdom and finds why things aren’t quite what they seem – a bit like Sir Charles Handy who, back in 1990, said he’s an exponent in upside down thinking.
But if we can’t rely on the consensus then what can we do?
Well, folks I might be wrong too – a scenario I often find myself in with “she who knows everything” (Mrs Steel), but Churchill, and his suggestion that history is a guide to the future (unless you’re an investment compliance statement) is the clue here, and research organisations like Ned Davis and Pring Turner (who preach from that pulpit) are a good place to start.
Ned Davis monitors a wide range of indicators correlating stock market movements with investor and expert sentiment. Over periods as long as 100 years his work shows a high inverse correlation between stock market movement and extreme optimism or pessimism. It also works with interest rates, commodity and currency price movements.
Getting good advice is the other because it’s easy to drown in all the information flooding in.
And at least with the investment lifeboat of independent advice in your corner you have the option to climb in or keep riding the waves with everyone else.
Alan Steel, Chairman, Alan Steel Asset Management
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