Good reads from around the Web.
Two excellent pieces this week on the pointlessness of trying to predict where economies or markets are going – even if you’re engaged in active investing.
On the first point, Nick Kirrage of the Value Perspective served up a thought experiment:
[Imagine it’s January 2009 and…] I am prepared to answer any macro question you want to ask. Then you can decide on your investments and, rather than waiting five years, I will give you a lift in the time machine and we will see how you have done.
“Fair enough,” you say. “What happened to house prices?” “Well,” I reply. “We saw a really nasty step down and then they pretty much went sideways for five years so, in real terms, you lost maybe 15% or 20%. Things have been picking up a little bit recently but they are still not great.”
“All right,” you nod. “What happened to banks?”
“Well, it hasn’t been pretty,” I reply. “There was the personal protection insurance mis-selling and Libor scandals, the euro was on the brink of collapse for much of the period and we saw a double-dip in the UK economy that almost turned into a triple-dip. At the risk of repetition, things have been picking up a little bit recently but they are still not great.”
“OK, last question,” you say. “What about the consumer and the high street?” “Basically, it has been a series of insolvencies,” I reply. “Blacks, Comet, Peacocks – just one business after another. The consumer has been trying to pay down debt but has not really managed it and is still very much in the red. No two ways about it, it has been brutal.”
It’s very unlikely that you’d have bought shares – especially housebuilders, banks, and retailers – based on that hypothetically certain forecast.
Yet many companies in these sectors have delivered superb returns since then and the FTSE 100 is up 70% or so, with dividends. Only paying attention to the fear prevailing in the market and the consequently cheap valuations could have helped you from a timing perspective.
Morgan Housel makes a similar point for the US Motley Fool, urging investors to stop paying attention to useless numbers:
One of the most dangerous things you can do is pretend the economy, or the stock market, is simple and easy to understand. It causes you to see patterns that are really just random flukes, and wrongly assume that if one lever is pulled over here, something predictable will happen over there.
This is one reason clueless, passive investors often outperform professional ones. Clueless investors aren’t tempted by false-insight masquerading as brilliance.
For most people, passive investing via index funds is an easy way to avoid the traps of market timing, misreading the runes, or reading stupid permabear-ish blogs that will one day be right, only in the same way Cliff Richard gets a hit single every two decades.
And for those of us silly enough to try our hand at stock picking (like me) the lesson is clear. Study businesses, not chicken entrails, and treat Nouriel Roubini and the rest of the professional prognosticators as court jesters rather than wise sages.
From the blogs
Making good use of the things that we find…
Passive investing
- The most overused fund management cliche – Rick Ferri
- Focus on what you can get for free – Turnkey Analyst
Active investing
- The Twitter IPO: The end game – Musings on Markets
- Going for long-term growth – iii blog
- Beware of relying on the CAPE ratio – Business Insider
Other articles
- The utter insanity of the UK housing market – Buzzfeed
- A retirement plan begins at the end – Retirement Cafe
- Fear and selective memory – Investing Caffeine
- Create more, consume less – Simple Living in Suffolk
- Hedgies under-perform, investors don’t care – Howard Lindzon
Product of the week: Tesco Bank now pays a table-topping 2.05% on savings, fixed for 18 months. True, this feels a bit like me topping the winner’s podium at the Olympics based on a wheezing jog around the local park, but at least the fixed term is short.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1
Passive investing
- 10 tricks that will help you beat most investors – Forbes
- Run a balanced portfolio on auto: More evidence – MorningStar
Active investing
- Should you buy shares in Twitter? – Morningstar
- Don’t fall for cold calls and other investing scams – Guardian
- Five ways to invest in solar and renewable energy – ThisIsMoney
- Words that should be banned – Terry Smith/Telegraph
- Why you should always back your friends’ startups [Video] – B.I.
- When risk is [dangerously?] sticky – FT Alphaville
Other stuff worth reading
- Why does Sweden have so many billionaires? – Slate
- Bankers or bakers? [Search result] – Tim Hartford/FT
- Random stuff happens. Don’t over-react! – N.Y.Times
- ‘Passivehaus’ and £20-a-year heating bills – Guardian
- Save or spend: Some couples share their budgeting – Guardian
Book of the week: I bought a copy of Conscious Capitalism
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- Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” [↩]
I pretty much agree with the sentiments, but I think you’re a bit harsh on Sir Cliff:
2008 “Thank You for a Lifetime” – No. 3
2006 “21st Century Christmas” – No. 2
2003 “Santa’s List” – No. 5
1999 “The Millennium Prayer” – No. 1
1990 “Saviour’s Day” – No.1
http://en.wikipedia.org/wiki/Cliff_Richard_discography#2000s
He’s had more hits recently than Kool Aid Schiff or Ribeena Roubini or those other stopped clocks for sure!
I call bluff. I recall reading this very post of yours in 2009. It stiffened the spine and I started buying, because the logic was compelling, even though I believed the economy was in terminal decline. But I didn’t know the economy was in terminal decline – indeed I still suspect it is.
I put it to you that the macro has a lesson, but it's not the one everybody takes away. You listed the regular take – it's all going to hell, sell up, don't buy, run away.
And yet your other post gives that the lie. The lesson, so hard to do, is equally simple, but inverted. But it's recorded on your 2009 post
Run towards fire. Buy (preferably in stages, and perhaps preferably low-cost index diversifed) whatever's stinking up the place – that's emerging markets and Europe at the moment I guess. Then sit on it.
Reversion to the mean is your friend, but he's not easy to live with, causes bad smells all over the place and generally has uncouth habits. In individual firms that's murder to get right – I held Rage software to the endgame in the 2000s. But indexes don't often go totally bust – and leaning against the flow may have its reward. And of course hazards of its own…
If you had mentioned that because of all these negatives that the developed nations were going to print money like there was no tomorrow then some people would have actually figured it might be a good idea to buy basically any asset. Any ideas on the end stage of money printing? ie, it actually works and economies start to grow and a tweak in interest rates causes no real detrimental effect or are we on a continued course of a weak economy and constant QE with no real end in sight.
@ermine — I’m glad someone read that post in 2009. 😉 But my point in that post was that shares were incredibly beaten down, not that the economy could only get better (though I definitely believed that it someday would). Indeed you’ll remember my premature “Britain is booming!” post I’m sure. I’m just as dumb as everyone else when it comes to the tea leaves… 😉 On that note, while of course I don’t think the economy is in terminal decline, you may well be right to discount my optimism!
@pkora — Well maybe, but I didn’t/don’t see much evidence that people did as it became somewhat clearer. My own views were driven by valuation. Macro hedge funds got it wrong for years and years on end, and consistently underperformed. It’s only in the past six months that everyone has really “bought” into the Fed backstop concept (which incidentally is one thing making me nervous, for what it’s worth, which is not much!) I think everyone misunderstood QE, myself included at the start. It’s much better understood as money-replacing rather than money printing, the latter is just a mechanism. The financial crisis took money out of the machine, and without putting money in, the machine would have spluttered towards a halt, like ball-bearings removed from some circular executive toy. Instead, the vamoosed money was replaced with Central Bank money. Eventually it will need to be taken out again. It’s not free — rates will be higher / credit tighter at some point in the future than without it. But better than a depression. Stock market price rises are rational (though not to an infinite level of course!) from 2009 levels given the avoidance of deflation and so on.
@david82 – Mea culpa, though I’m not sure which of us should be more red-faced on your revealing that evidence. 😉
> But my point in that post was that shares were incredibly beaten down, not that the economy could only get better
Aren’t these two linked, although with a phase shift? They were beaten down because people took from the economic situation that the current was the expected future. If it had turned out that way they’d have largely been right, so your qualification ‘beaten down’ inherently implies an expectation that the economy would get better. And you were right, reversion to the mean was your friend.
I invest despite my expectation of terminal decline because I don’t necessarily expect to live long enough to see the denouement – if there is enough relative lift to do me some good then fine. Since it’s about the future hopefully people can turn it around. I’m just as unsure about my prediction as you are of yours. Sometimes you have to run with F Scott Fitzgerald and “hold two opposed ideas in the mind at the same time, and still retain the ability to function”.
Somewhere I read that we overestimate the effects of change in the near term and underestimate the effects of change in the long term. A phase lag like that would explain some of the oscillatory behaviour of economies and markets, lurching between irrational exuberance and irrational despondency. Your thought experiment showed how it’s easy to overestimate the effects of change in the short term. That’s not necessarily a reason to discount the macro altogether.
I bought Europe despite expecting (and still expecting) the Euro to blow. Partly on valuation, and partly to lean against my short-term expectation, particularly at attractive prices. Provided I have enough diversification, sometimes it’s good to try a bit of the other, in a tip of the hat to the known unknowns and the unknown unknowns out there. Indeed, the very term attractive prices shows I assume that even if the euro blows, the ill wind will do enough European firms some good that there will be a lot to salvage from the twisted wreckage.
I think where most people go wrong with the macro is projecting the known knowns onto the other three quadrants of knowledge – they’re almost bound to be more than half wrong doing that.
I wish I had read that post in 2009 – instead I was reading ZeroHedge and expecting worldwide Armageddon, whilst putting shorts on SPY…
Ha ha, I laugh at myself now.
@Lee — Well, let’s remember they were very tough times, and things might easily have gone a different direction, at least for a while, if there’d been a policy mistake or another shock of some sort.
In general the lesson re: ZH is never to get all out of everything (or all into everything). For example I’ve been a bit nervous about increasing bullishness about the stock market since early summer, but I’m tweaked my various allocations and stock holdings, rather than tried to wholeheartedly time the market. It’s just too hard, since a major component of equity prices is emotional (i.e. the multiple investors are prepared to pay for a company).