There are two types of forecasters, those who don't know and those
who don't know they don't know".
- Howards Marks
Yesterday, my dear friend Nick Kakalisfrom Finance Unlimitedasked me to speak at a networking event. (Disclosure: Finance Unlimited handles my personal insurance)
I should have titled my talk, 'The Gutless Adviser' because for the first 8 minutes or so, was justifying why I don't do forecasts. It made think about all the AFL pre-season predictions the media make and how they compare to the ladder come the start of September. It's a fun exercise when it comes to football, not so much when investing.
It’s rather odd that I'm a Wealth Adviser yet I don't do forecasts. With forecasts, not only do you have to be right, you have to be right quickly. If I predict a market crash, and it happens 10 years later, that doesn't make me right. It makes me early. There is a fair bit of opportunity cost to be had as a result. Below are some selected (and rather cheeky examples) and to why forecasting is virtually impossible, even for those CEO's in the know.
The BHP Billiton (ASX:BHP) board and its CEO at the time, Marius Kloppers, launched a formal bid for rival Rio Tinto (ASX:RIO) on November 8, 2007. The reason why the date has stayed with me is because exactly 7 days earlier, on November 1, the S&P/ASX 200 Index peaked at 6851.5. What fascinates me about this example is, not only did one industry leader (BHP) fail to predict its own cycle, but two. The Rio Tinto board instructed its CEO at the time, Tom Albanese, to REJECT the offer saying 'it was a couple of ball parks away from RIO's true value'. Technically he was right, it was a few ball parks the other way though.
In October 2010, James Packer revealed he had purchased a 15% stake in Ten Network (ASX:TEN) for $245m. He ended up lifting his full stake to 17.88%. Bruce Gordon, a media mogul in his own right, had also paid top dollar for his 13% ownership in the company. And finally, Gina Rinehart, Australia's wealthiest woman, who just wanted to sit on the board and annoy people, also bought a 10% stake in TEN in November 2010 for approximately $1.60 a share. To top things off, Lachlan Murdoch was concerned he had missed out on what he, and others, believed to be a very important and relevant media asset, phoned his friend and convinced James Packer to sell him half his 17.88% stake for approximately $130m. This week, Bruce Gordon and Lachlan Murdoch launched a merger bid for Ten Network. They can now own the whole company for $58m.
Trump. Brexit. Two other reasons why reading 'Market Outlook' forecasts in January are not a good allocation of one’s time.
Not for a second am I suggesting I'm smarter than these successful business people. Far from it. I'm instead using them as examples to illustrate how difficult it is to forecast what will happen in the future, despite one’s pedigree or experience.
So OK smartarse...what am I supposed to do?
You can allocate capital in one of two ways.
You can construct a diversified portfolio, with some basic sophistication, and if you have a long enough time horizon and reasonable temperament, it will do quite well.
The second way is based on a grand declaration or fanaticism. Screaming to anyone who will listen, 'the bloke with the funny haircut will bomb someone, sell everything and buy Gold'. Then you wait, and wait and wait, anchoring yourself to that grand declaration. It significantly increases your probability of suffering permanent capital loss or if you're lucky, severe opportunity cost, which is still costly. Keep in mind, this type of investing is likely to turn you into a fanatic. What is fanatic? Someone who won't change their mind and won't change the subject.
Footy Predictions are fun and making grand declarations about who will win the premiership gives you a great reason to brag to your mates about how great you are, but there usually isn't any cost associated with that apart from looking like a chook when you get it wrong.