The elections in France and Greece held this weekend introduce yet another layer of uncertainty and complexity into what is already becoming a fascinating conundrum for investors; namely, how to factor the approaching endgame of the Eurozone crisis into their thinking and planning for the future. The ever changing political dynamics in Europe, overlaid on a deteriorating and inherently unstable economic situation, make conventional linear analysis difficult.
Author: Jonathan Davis
Author, columnist and investment professional.
The Simple Truth about Good Forecasting
There is always a lot to be said for keeping things simple, and it is gratifying to see how robustly accurate some of the simplest methods of asset class forecasting continue to be. The secret of building a robust long term record, experience suggests, lies in giving yourself a sensible time horizon (at least five years), concentrating on a few fundamental valuation metrics and downplaying or better still ignoring wherever possible macro-economic forecasts.
End of Bull Run Will Be Cause for Celebration
Anyone who puts their head above the parapet to offer a view on the direction of the markets knows they run the risk of being made to look foolish. It is an occupational hazard. In my experience most pundits get more criticism for making the right call at the wrong time (typically too early) than they do for making the wrong call and sticking to it when it goes sour. You rarely get fund management or journalism awards for being right in the wrong calendar year, any more than you would expect to get a big bonus at an investment bank for making a great (but premature) market call outside the annual bonus cycle.
Contrarian Indicators
If one thing puzzles private investors more than anything else, it is the extraordinary capacity of the stock market to move in ways that appear to follow no discernible logic. “Profits Up: Shares Tumble”, or even “World War Declared: Stocks Rise” – such headlines are understandably prone to cause confusion for the uninitiated. In reality there is nothing strange about this pattern of behavior, and understanding why explains why being a contrarian – going against the thrust of expert professional opinion – is so often the key to the greatest investment success.
The Dangers of Group Think
“Disagreeable data are streaming out of the computers of Becker Securities and Merrill Lynch and all the other performance measurement firms. Over and over and over again, these facts and figures inform us that investment managers are failing to perform”. So began Charlie Ellis’ landmark article in the Financial Analysts Journal back in 1975, describing why he believed that money management had become a “loser’s game”. The investment management business, he wrote, “is built upon a simple and basic belief: Professional money managers can beat the market. That premise appears to be false”.
What the Forecasts Reveal About Market Sentiment
The year’s batch of New Year market forecasts has been the usual source of interest. Not, obviously, because they tell you what is going to happen – the only thing we know for sure is that what is foretold will definitely not take place – but because of what the clues they give about market sentiment. However bullied, charmed or cajoled into making predictions, most professional forecasters in my experience know full well that the value of their forecasts is at nugatory at best.
Jonathan Davis 