Wednesday, February 14, 2007

Don't Trust the Forecasts

Peter Martin, Economics Editor of The Canberra Times. Posted this blog some time ago:

It’s the time of year to make forecasts - to gather together a group of experts to predict the course of politics, interest rates and the stock market throughout 2007. Most of the papers do it.

I’m here to issue a consumer warning: You would get a better handle on 2007 if you wrote out scenarios on scraps of paper, pinned them to dartboards, blindfolded yourself and aimed the darts.

Think I’m being too harsh?...It is one of the best-kept secrets of punditry that the better known a pundit is, the less likely are his or her forecasts to be correct. That’s right – the LESS likely...

...The problem facing experts is that they have the tools (and often the incentive) to convince themselves that their pet theories are right even when a rough glance at the evidence suggests that they are wrong. They know enough detail to convince themselves of things that you or I could not.

...year after year, in aggregate Australian fund managers have performed worse for their clients than they would have had they just left the money in the top 100 stocks and done nothing...

Daniel Kahneman, the first psychologist to win the Nobel Prize for economics, has coined the phrase “delusional optimism” to describe the way in which most of us convince ourselves that we are better at what we do than we really are.


Tuesday, February 06, 2007

Is Now the Right Time to be Buying Shares?

This from the Bloomsbury in the UK, but it follows a theme that is very relevant in Australia as the ASX moved into record territory again this morning:

Is now a good time to commit funds to my long term investment portfolio, given that stock markets have had such a good run recently and some commentators suggest bad times are on the way?

The simple answer is that we don’t know if it is – and we suggest that nobody else does either...

As William Bernstein put it:
"There are two kinds of investors, be they large or small: those who don't know where the market is headed, and those who don't know that they don't know. Then again, there is a third type of investor - the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know."
... our approach is that provided you invest in accordance with your risk capacity and that you hold a diversified portfolio which is aligned with your objectives, there is no reason to expect that trying to predict market turning points will be an effective tactic.

Our view is reinforced by some research carried out by committed active management house Fidelity in 2005, so perhaps we should leave the last word to them...
Fidelity looked at the effects of investing in five major equity markets over a 35-year period to 31st December 2005 on the best, worst and a randomly selected day in each year. The impact for such a long term investor of getting it right (or wrong) was minimal – as Fidelity says, “… investors…do not need to be timing experts to benefit from stockmarket investment.”