Don’t worry, not a technical one this week.
If you travel on the tube, or buses, or even just read magazines (for younger readers, they’re kind of like a blog, but printed on paper) you might be forgiven for thinking that prediction is easy. There is a lot of financial advertising out there, and most of the stuff about managing money seems to suggest that the manager in question has some secret sauce that means they can work through the thousands of choices about which stocks to buy will be best.
I’d love a crystal ball – but the really important thing about a crystal ball to be useful isn’t that it predicts the future perfectly, but that it does it better than other people’s crystal ball.
If everyone has a perfect crystal ball then getting 6 numbers on the UK National Lottery gets you about 40 pence for your £2 ticket (ignoring guaranteed minimums) as you share the prize with EVERYONE else – prediction isn’t about perfect foresight, it’s about better foresight giving you an advantage over your peers.
So, do fund managers have an advantage? Well, they can’t all have an advantage. As at the point I’m writing this, we’ve just seen NVIDIA stock drop by 17% because a Chinese company can do AI on cheaper chips. Still NVIDIA chips, just cheaper ones, and fewer of them.
Who predicted that? Well, in the coming days a few people will shout out that they knew NVIDIA was overpriced. And there will be others who say “now’s the time to buy, it’s just a blip”. Who’s right? Dunno. And that is disappointing, because I have the same crystal ball as everyone else, which is to say not much use for reliably predicting the future.
If you’re going to predict the future for a living, it’s easiest to be a doom-monger. There was a possibly apocryphal story of a wealthy Doctor in London, who knew COVID was going to be bad, and sold everything in December 2019. So avoided the ~40% crash in the stock-market from February to April 2020. For a while, in April and May 2020, we had a bona fide sage. We never heard whether he also avoided the subsequent huge rally that made 2020 overall a great year for long term investors, so either he got lucky for a while, but lost overall (as doomsayers tend to) or he really can predict the future but sensibly decided not to share.
Not everyone should be invested in risk assets that can fall as well as rise – but that’s about your capacity for loss, and how you react to risk, it isn’t about whether markets are going to go up, down, or sideways. If you ask me whether they are going to go up, down, or sideways, my answer is always going to be “Yes”. Sadly, I don’t know when, or in what order. Happily, neither does anyone else.
So, since no-one has that working crystal ball (and there is copious statistical evidence that this is a true statement), what should we do?
Stay invested. In line with your long-term goals, and in a way where you can sleep at night. Pick partners you trust, whether that’s investment funds, or financial advisers who can help you with your financial plan. Make sure you understand the broad direction of what you’re doing, no matter how technical, and agree what ‘good’ looks like. Then go do something more interesting until it’s time to review how things have done.
If you chase performance, it will run faster than you can pursue, and you will instead catch its slower cousin, under-performance, and that is a prediction you do not want to come true.
