In order to invest well, we do not need a crystal ball
"And so Pierrrre...", as Willem Ruis used to say in his shows. But instead of the legendary phrase "what have they won?", the words should be "is this year going to be a good one for the markets?"
This is the eighth part in our series of articles "The 10 most glaring misconceptions about the stock exchange".
"What will the stock market do this year?" is easily the most commonly question asked at the end of the year. And it is not only me that gets asked the question. Just browse through the financial newspapers, magazines and blogs from the end of December and early January and they are full of predictions. The bolder, the better. A bold prediction, a rapid rise in share prices or even better, a dramatic crash, always gets plenty of interest.
My answer is not at all spectacular, but a bit of a damp squib: "I don't know." I must admit that for a shares pundit, my answer offers slim pickings. So let me repeat the only correct answer that the most legendary banker of all time is quoted as saying: "The stock market will fluctuate, young man" (John Pierpont Morgan responding to a question from a young journalist).
This time I would like to add "more than necessary": the stock market will fluctuate more than necessary in 2017. And I must also admit that this is not a brash prediction. The market always fluctuates more than is really necessary. Exactly one year ago in January 2016, the market dropped so dramatically that approximately EUR 5,000 billion in share prices were wiped out. Why? Because investors feared a crash. Because China was acting oddly and oil became really cheap. It was definitely not because of major news the markets reacted to. The wave of selling was simply an expression of the anticipation of bad news. The same principle was in operation with the 5,000 billion rise in share valuations since Donald Trump won in November; people are anticipating. But this time it is hope, not fear.
The markets fluctuate more than necessary because most investors are not guided by facts and reason, but by their expectations and emotions. The more unpredictable the future, the greater the part played by a person's psyche, and thus the greater the fluctuation we experience. By definition, the future is always going to be unpredictable.
But with the enigmas such as Trump, Brexit, reflation, Le Pen, Putin, Erdogan, IS, Wilders, Xi and Kim, it looks like 2017 is going to be even more unpredictable than normal. So let me refine the JP Morgan quote slightly: "the stock markets will fluctuate more than necessary and more than average this year". There will therefore be more volatility, and that comes with opportunities: in times of crisis, we have the chance to pick up selected shares at very low prices (in the second part of this series we learned that volatility is a boon for level-headed long-term investors).
So, is it not possible to predict anything about the markets? Could it be true that the tips given by someone who has immersed themselves in the science of the markets for years will be no better than a blind monkey, as Burton Malkiel suggested 43 years ago? Yes, it is true. The conclusions drawn from hundreds of studies since Malkiel made this claim go one step further: the blindfolded monkey throwing darts at a list of shares normally does better than an experienced expert!
At the same time, it is not true.
It is only true in the short term. The studies involving blind monkeys only lasted for a year. The studies are often presented as a little competition: the expert selects five shares and the monkey (or child) chooses five shares at random from a list. After a year, the monkey wins. Firstly this is because the monkey does not have the expert's insights, which is actually an advantage in a short-term competition. Experts will ponder things, and in times of crisis this may count against them. They can panic at the wrong moment, as investors so often do. The monkey never panics. The monkey will never change direction as the price movement is of no interest to him.
Over the long term, shall we say at least three years, the expert has all the chances of making a profit on their side. If the expert knows their job, they can make a better selection than a blind monkey, based on fundamental analyses and a good understanding of their sectors. It then comes down to assessing the comparable value of a company based on knowledge and reasonable assumptions rather than matters such as "what will the impact of Trump be on the world economy and the markets?" These sorts of questions cannot be answered. They are amateur attempts at predicting an unpredictable future. Investment strategies based on this method are doomed to fail.
Warren Buffett, one of the best investors of all time, said: "Short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children." He was allegedly responding in frustration to what the media were doing in their reporting in 2008, during the depths of the financial crisis. "We're certain, for example, that the economy will be in shambles throughout 2009 - and, for that matter, probably well beyond", he wrote. "But that conclusion does not tell us whether the stock market will rise or fall." The newspapers only reported the first part of his message and gleefully put their own spin on it: the markets will go to the dogs.
The good news is that short-term forecasts are not met with consistent performance on the markets. At Mister Market Magazine, we have our own system that forces us to sell in well-defined situations, meaning that we take profits promptly and shares that are performing poorly are sold relatively quickly, irrespective of the market climate and what the gurus are predicting.
In short, in order to invest well, we do not need a crystal ball. To reinforce this point, John Maynard Keynes, as well as being a great economist and investor, only really began to invest successfully after he realised he should not pay any heed to his own economic expectations.
We believe that 2017 will be a good year on the markets for Belgian shares.
Pierre Huylenbroeck is the author of Iedereen belegger (Everyone's an investor) and publisher of Mister Market Magazine, a digital fortnightly magazine for investors with inquiring minds. Please do not hesitate to download a free trial issue.
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