Investor Points of Few – The Seven Year Itch

  1. “The overwhelming majority of people who make market predictions are either wrong or lucky.”

By Alan Steel

I expect someday that the gaggles of crystal ball-gazing investment gurus out there will suddenly wax-off their misguided market predictions (and let suffer those who listened) in true Ray Bradbury style, by saying, “I wasn’t trying to predict the future, I was trying to prevent it.”

Hmmm…and all that damage done in the name of a stock market salvation, eh? There’s not much amazing in that sort of grace. 

Which brings us to the latest doomsday detritus, at least that I’ve noticed, in from the strategists at GMO just this past weekend. 

And like so many other fortune-telling efforts near Christmas, it’s a somewhat less-than-festive naval gazing perspective (lint included) that appears to exercise this particular firm’s penchant for a seven-year “predictive itch.”

Now, you might wonder why GMO has chosen to look seven years ahead? Why not one of the other numbers in the mystical Pi stable of numerology in order to somehow divine the stock market’s future circumference based on its current diameter?

Well, that’s a bit of a riddle wrapped in a mystery inside an enigma, as is their conclusion that we should expect negative returns from ALL stock market Indices for the next seven years on the premise that “markets” are highly overvalued now.

Double hmmm…

By way of background, GMO and Jeremy Grantham are regular players in the seven-year predictions of gloom sweepstakes.

In fact, some genius has even “confirmed” that their previous predictions of market returns are almost flawless…

OK, they didn’t actually say “flawless” but instead found a point-something factor that certainly implied it.

So, riddle me this: GMO’s prediction in Sept 2009 was that the S&P 500 would return less than 5% compound over the following seven years.

In reality it returned 16.02%, and then over the next 12 months (out to Sept 2017), even more. 

By example, GMO called for a 4.5% per annum return on $100,000 over seven years, which comes to $136,000. Wonder how many investors turned away from the markets based on that suggestion?

Now compare that to the actual return delivered; 16% for seven years, which comes to $282,000.

Flawless predictions, eh?

More like severely flawed!

Anyone can find this out, by the way. All I did was employ a bit of the old Nullius in Verba (which means, “Never take anyone’s word for it”). It’s a statement and code of practice that has stood the tests of time like a Latin sanskrit for the Royal Society since 1660.

So I had a wee Google about to check and see if we’ve heard this story of flawless predictability before from the land of GMO.

Lo and behold, they followed up in 2010 with another seven-year scratch and grab, telling investors that the outlook for almost every asset class except timber (yet another mystery) was lousy.

And the reason for using the lucky number seven? Well, apparently it takes that long for valuations to reliably revert to mean.

Will wonders never cease…

Sadly when their output is squared up against the eventual outcome their luck runs out. 

And so too for those who followed these predictions and avoided the markets. In simplest terms they ended up missing out on a lot of Pi.

Now, I certainly can’t predict the future. But what we can do instead is quite easily use technology to check on the accuracy of those who try to, past and present.

The truth is that most people who make market predictions are either wrong or lucky.

So the next time someone opts to scratch their predictive itch in public, you’re probably better off looking the other way.

Alan Steel, Chairman, Alan Steel Asset Management




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