Predictions Are Pointless
Pfäffikon SZ, Switzerland – It’s been raining predictions of all sorts over the last several weeks. It’s remarkable that there is such a wide range of opinions. Even more remarkable is the fact that many investors are getting wound up about these predictions. Perhaps it would be a good idea to put last year’s predictions next to this year’s news items. The conclusion is simple: Predictions offer no added value and are utterly pointless.
Action
Predictions are part of an underground game designed to mobilise you to take action. When you trade, money is made off of you, even though many claim trading is free. Take it from me that nothing is free in the financial world. The likelihood for volatility has undoubtedly increased, now that central bankers are, one by one, going their own way. Apparently, investors still need to get used to the new situation and in doing so, are relying too heavily on the crystal ball.
Fisher Effect
Monetary politics is difficult to comprehend for many individuals and often incorrect conclusions are drawn based on certain decisions made by central bankers. Last month was an illuminating example when the ECB and the Fed – consecutively – gave further shape to their policies. Investors too often couple monetary policy to the direction of movement of interest rates. This, however, isn’t the right measuring stick for monetary policy. In this vein I would point you to the so-called “Fisher effect.”
Absorbing
The Fed’s policy is aimed at further normalising its monetary policy. The key question is whether the commercial banks are able to jack up their lending in this new playing field. If this is the case, then there is a high likelihood that the economy will absorb, so to speak, the hike in interest rates. The simple conclusion would then be that the current bull market – which is coming of age – still has a couple of years in store before it reaches its ultimate peak in the cycle. The fact that, in the meantime, the markets make weird jumps can be labeled as noise, whether they’re fueled by vague predictions or not.
Selective
Responsible and successful investing, in my view, revolves around extreme selective positioning and mainly having patience. Investing on the basis of predictions (or fiscally driven constructions) is destined to fail, as you are taken prisoner by the increased volatility or the taxman. Legendary investor Charlie Munger, for decades now, has maintained a checklist and a binder documenting all the mistakes he’s made. Investing is not an exact science and an IQ of 145 is also not required. On the other hand, the profession is replete with (mental) pitfalls that in the past have tripped up even the smartest kids in the class.
It remains for me to wish you a good weekend and a prosperous new year.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above mentioned shares and has no intention of doing so in the next 72 hours.
