Bloomsbury newsletter, 30 September 2018
Not long after Ronald Reagan's tenure as US president, chuckles were heard around the world when word got out that his wife Nancy sought an astrologer's guidance for all manner of things during his presidency, including matters of diplomacy, Cold War politics, and even the timing of the president's cancer surgery. People were flummoxed to think that momentous issues were influenced by an astrologer's musings.
However, belief in the magical ability of some people to foretell events isn't confined to the political world. A form of it, albeit a much more sophisticated variant, exists in the investment world – forecasting.
Before anyone says that it's unfair to place market forecasters in the same bucket as astrologers, have a look at this - 1 January 2012, Otago Daily Times forecast "a middling year" for New Zealand's share market.
So, what actually happened? The NZX50 index rose 24% that year. So much for a middling year!
A look through market forecasts in any newspaper, in any year, will throw up many such examples; headlines and forecasts that generated hullabaloo, but later proved to be way off the mark.
More recently, in January 2017, Noted wrote that "the easy gains for [New Zealand] share investors appear to be over." Last year, the NZX50 index rose 22%. National Business Review predicted "the end of the golden run" in early 2016. That year, the NZX50 index rose 9%.
The New Zealand market isn't the only one that has surprised. In 2017 forecasts for markets in the USA, UK and Australia all defied predictions. Emerging markets also challenged gloomy predictions by posting substantial gains.
Looking back is always illuminating. If there is one lesson to be learned, it is that forecasters rarely get it right.
It is true that, in early 2017, share market valuations were high and there was a great deal of uncertainty surrounding the new Trump administration. It's always wise to be aware of factors that can influence markets, both positively as well as negatively.
But remember that share markets are efficient – all publicly available information, whether optimistic or pessimistic, is already reflected in prices.
Most economic models use a range of assumptions and point to a range of future possibilities, which generally means, the more precise the forecast, the more likely it is to be wrong. That kind of nuance isn't easy to report.
And that is largely because of the unforeseen. Risk, in other words. This is the price of investment and, in fact, of life. Humans, as a rule, aren't comfortable with facing this uncertainty. It is much easier to hone in on what look like specifics and certainties.
Yes, there are unexpected calamities, but don't forget that the unexpected can be a positive. Not only that, but seemingly bad news can boost markets. A bad earnings result can see a share market gain, if the result was not as bad as had been expected. A feared piece of economic news can result in an upturn if the statistics, which had already been priced in, were not as dire as predicted.
It's wise to be aware of market concerns. It's important to assess the amount of individual risk you're comfortable with. It's folly to be swayed by forecasts.
Certainly, it would be foolishness to exit your investments on the basis of forecasts which may never come to pass. Instead, take the challenge of carefully designing a portfolio which is robust enough to ride out an unexpected downturn and optimistic enough to take advantage of unexpected gains.
The only certainty about the future is that is it uncertain. What we can be certain of, though, is that a shrewd and well planned investment strategy sure beats relying on forecasting or astrology.