Discipline and detachment – why it’s important to ignore the noise
A few months before the first iPhone was launched in 2007 Steve Ballmer, CEO of Microsoft, declared: “There’s no chance that the iPhone is going to get any significant market share. No chance.”
Predictions can make entertaining reading, but can be even more amusing in hindsight. The headlines in the financial press at the start of 2013 meant many investors spent much of the year anxiously awaiting blow after economic blow that largely failed to occur.
Back then, the publication Financial News told its readers that ‘political storm clouds loom over the global economy. From Washington to Beijing, the financial markets are in thrall to seismic political events’.
Prominent economic forecaster Nouriel Roubini, dubbed Dr Doom for his often pessimistic views, gained recognition for correctly predicting the global financial crisis but has struggled to give an accurate forecast since. He suggested that four elements – stagnating US economic growth, the European debt crisis, a slump in emerging markets, and military conflict in the Middle East – could combine and lead to a ‘superstorm’ in 2013.
In fact, the unusually strong performance of stocks in 2013 came as a welcome surprise for investors following a simple buy-and-hold strategy and a source of exasperation for many professionals caught flatfooted by the steady rise in share prices.
Despite a senior columnist from Forbes predicting that the American S&P 500 Index ‘drops to 800, a 42 per cent decline’, it finished up by around 30 per cent, on track for its biggest annual gain in more than a decade.
Investors who listened to ‘noise’ about the latest sure thing in stocks will also have come unstuck. Many headlines suggested the road to riches was lined with shares in Apple but the reality was a little different. While the S&P soared, Apple returned just 7.6 per cent, underperforming by 24.8 percent. And despite collective insight telling us that the price of gold would escalate, it suffered the largest annual decline since 1981.
Forecasters also advised avoiding European stocks as Europe’s recession and the slow growth in the US would mean the highest returns would come from the fastest-growing economies such as China.
China’s economic growth slowed from double digits but still grew at about 7.6 per cent in 2013, more than four times as fast as the estimated 1.7 per cent rate for the US economy. Despite these differences in growth rates the American Vanguard 500 Index Fund gained 32.2 per cent, while China’s equivalent ETF lost 2.2 per cent. In Europe, Vanguard’s European Index Fund returned a healthy 24.7 per cent.
The UK started 2013 on the brink of a ‘triple-dip recession’ but ended it as one of the fastest growing economies in the developed world.
The historical evidence demonstrates the real challenge in giving good market forecasts. Results from every year tell us we should be sceptical of our ability – or anyone else’s – to predict the future well enough to outperform a simple buy-and-hold strategy.
Yet millions of investors will base their decisions on the predictions of so-called gurus. This is not to say the media stories are necessarily incorrect. Most of them accurately reflect the sentiment prevailing at the time they were written and the uncertainty about the future as expressed in prices.
But as an individual investor, there is not much you can do about that. These expectations and uncertainties are already built into the market. Investing is about what happens next and as we do not know what happens next we diversify. The well-known ‘confirmation bias’ will also be at work –investors are more likely to believe and act on a forecast that agrees with their own beliefs.
Earning the rewards offered by the world’s capital markets requires a combination of discipline and detachment that can elude many investors. The strategy most likely to allow you to achieve your goals is to have a well-developed and written investment plan, and adhere to it – ignoring not only short-term forecasts, but the ‘noise’ of the market as well.