By now it’s likely most of you will have read your fair share of reports discussing what may be in store for us in 2018: “7 reasons investors should go for gold in 2018,” “Oil is headed to $40 per barrel in 2018,” “we are at the beginning of a big secular bull stock market…” (I did rather enjoy that one – a secular bull market beginning right after one of the longest bull markets in history!).
Andy and I don’t feel compelled to offer up any predictions of our own, and I’m not going to this month. You’ll find that almost every year the prediction is for 8-10% return based on a long-term average while not really taking into account any economic assessment. What I’d like to provide you with is somewhat of a framework for interpreting the various predictions you may have read (and for that matter any other kind of research or report you might read).
Now more than ever, investing is to a large degree an exercise in information management. Thanks to the internet, we all have access to almost limitless amounts of information and opinion. As investors, we need to learn how to manage all this data and filter out the chaff – who do we listen to? What matters? What doesn’t?
According to the Stock Trader’s Almanac, if the US market closes up on the 3rd January, there’s a very high chance it will have a positive year. Check – we had a positive day on the 3rd. But does that really matter? Should we sell a bunch of December index Put options in reliance on that correlation?
Information management starts with having a strong knowledge of how things work – economics, history, and markets. Without this it is easy to get led astray by a captivating blogger who makes a compelling argument, which is not supported by fundamentals. To paraphrase Mark Twain, “it isn’t what we don’t know that gets us in to trouble but what we do know that simply isn’t true.” I’m reminded of the aftermath following the GFC when people were saying the Fed’s QE program would invariably result in a hyperinflation and a collapse in the USD. We’re still waiting. I now see that same argument being used to justify the rise of crypto-currencies.
Another unfortunate outcome of the proliferation of financial content on the internet is that we no longer have to be subjected to anyone’s opinion that contradicts our own. We can assemble a nice selection of information sources that all tell us the same thing, all of which supports our preconceived view. This is known as confirmation bias where we seek validation rather than challenge. We can feel good that we have done 3 hours of research and are confident that we are positioned properly.
Whenever I’m reading something, I always have in the back of my mind “who wrote this?” What I ideally want to understand as best I can is what their world views are – what do they believe in? Perhaps more importantly, I’m conscious about where they work as this will often result in certain biases of justification.
Rising markets are great for business on the sell side: brokers, salespeople, traders, and analysts. Life is good when the markets are rising. I’ve been there: clients are making money, portfolios are growing, management fees are increasing, clients are receptive to new ideas and ready to trade.
Given this, there’s a tendency towards perpetual optimism on the sell side. That’s not to say their opinions are worthless; it’s just important for us to remember where they are coming from.
Conversely, some prominent financial websites (and plenty of non-financial ones) have discovered that negativity is a great business model too. They load their websites with as much negative commentary and fear as they can. Again, I’m not saying that this content is all useless but it’s important for us to remember where its coming from.
So, it’s important to seek out differing views on the same thing. Even if we feel we don’t agree with them from the outset. Making decisions based on a single source of information, such as your broker/financial adviser or one web opinion, is not a good idea. Sadly, there’s often more bad news in our quest to make good investment decisions.
Psychologists have learned that humans are very poor at predicting futures that don’t benefit them. Rutgers University psychologist Neil Weinstein discovered the concept of “unrealistic optimism” by accident in the late 1970’s. For no real reason, he asked study subjects to rate their likelihood of experiencing certain negative future events such as getting divorced, being fired or getting mugged, on a scale of “below average” to “above average.” Curiously, all the responses were “below average.”
His research showed that people don’t completely reject risk – “it can’t happen to me” – they simply perceive the likelihood of a negative event as being less likely for them than others. This is the case even if they know they have the same risk factors. For example, someone may know they have the same health and risk factors as others such as family history, weight, diet and other health factors, yet they are still adamant they are less likely to get diabetes or heart disease that their peers with the same health factors.
Another example: in a 2015 Pew Research Centre survey, 65% of “average” American workers predicted that most jobs would be automated within 50 years. Yet 80% of the respondents believed their job would be safe. One more example: in November 2007, the Philadelphia Fed’s survey of professional forecasters predicted just 20% chance of negative economic growth in 2008 despite rising market turmoil and clear signs of recession.
It appears that anxiety and a desire, or even a need to be right affect people’s predictions subliminally. We only gather and synthesise information about a situation that supports the outcome we want. Neuroscience research suggests that facts supporting a desired outcome are more readily available in people’s memories than other equally relevant but less supportive information.
Unfortunately, knowing about these human tendencies is not enough to control them. Filtering out “unrealistic optimism” from our predictions is difficult because it has so many sources: our own world views, self-interest and our personal biases. The best forecasters have a way of consciously acknowledging when their assessments are being clouded by “unrealistic optimism.”
Another key trait in successful long-term investing is an ability to change your mind. This may sound simple, but to many it isn’t. We do our research, we make a prediction, we make an investment decision, we own that decision and stand by it. For many, it becomes difficult to change our mind, even if presented with alternative information. Those facts supporting the desired outcome are more readily available within our perception.
In the financial world, changing your mind is often seen as some sort of weakness. You occasionally see pundits on financial TV being chastised by the host – “when we last had you on the show you said something different.” There’s nothing wrong with changing your mind. In fact, if circumstances change and you haven’t changed your views, you could be in for a significant problem.
To pull some of the above together; I don’t necessarily believe that those economists who made those terribly optimistic predictions in 2007 are useless (some of them maybe) or were being less than honest in their prediction. The psychology shows that there is some deep unwillingness to predict bad events. Additionally, their judgement might be clouded in “unrealistic optimism” given a negative economic environment would not benefit them. They say something along the lines of “I’m not saying it won’t happen, but I consider the chances of that negative event quite low.”
Similarly, I don’t believe that every Chief Economist at every major broker is sometimes being deliberately dishonest by being almost perpetually optimistic. They find their way into those roles because their beliefs correlate with what’s good for the firm in general and they suffer from “unrealistic optimism” because a perpetually rising market is good for them, their friends and family.
It’s the same with company executives: Imagine an iron ore company executive who has a negative secular outlook for the iron ore industry. It’s almost impossible. In order to secure that job you would need to demonstrate your relentless passion and optimism for the industry. Yet investors and analysts too readily accept their bullish enthusiasm with little scrutiny, on the basis that they know their business the best.
So, I want to challenge you to review your own predictions through this lens. Deep down, we all have a relatively strong view on some things we expect to unfold this year, or next year. But do those outcomes have a sound fundamental basis. Have you read enough opposing views to challenge and hopefully reaffirm your opinion? Have you discounted those potential outcomes? Do you think you have fairly assigned the probability of being incorrect or could your predictions contain too much “unrealistic optimism?”
As long as we can answer those questions while being honest with ourselves, and we are willing to change our mind if the facts change, then we should hopefully have a very successful year.
This document contains information which is the copyright of Aviator Capital Pty Ltd (AFSL 432803) or relevant third party. Any views expressed in this transmission are those of the individual, except where the individual specifically states them to be the views of Aviator Capital Pty Ltd. Except as required by law, Aviator Capital Pty Ltd does not represent, warrant and/or guarantee that the integrity of this document has been maintained nor is free of errors, interception or interference. You should not copy, disclose or distribute this document without the authority of Aviator Capital Pty Ltd. Aviator Capital Pty Ltd does not accept any liability for any investment decisions made on the basis of this information. This information is intended to provide general information only, without taking into account any particular person’s objectives, financial situation, taxation or needs. It does not constitute financial advice and should not be taken as such. Aviator Capital Pty Ltd urges you to obtain professional advice before proceeding with any financial investment.
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2018 Predictions
2018 Predictions
By now it’s likely most of you will have read your fair share of reports discussing what may be in store for us in 2018: “7 reasons investors should go for gold in 2018,” “Oil is headed to $40 per barrel in 2018,” “we are at the beginning of a big secular bull stock market…” (I did rather enjoy that one – a secular bull market beginning right after one of the longest bull markets in history!).
Andy and I don’t feel compelled to offer up any predictions of our own, and I’m not going to this month. You’ll find that almost every year the prediction is for 8-10% return based on a long-term average while not really taking into account any economic assessment. What I’d like to provide you with is somewhat of a framework for interpreting the various predictions you may have read (and for that matter any other kind of research or report you might read).
Now more than ever, investing is to a large degree an exercise in information management. Thanks to the internet, we all have access to almost limitless amounts of information and opinion. As investors, we need to learn how to manage all this data and filter out the chaff – who do we listen to? What matters? What doesn’t?
According to the Stock Trader’s Almanac, if the US market closes up on the 3rd January, there’s a very high chance it will have a positive year. Check – we had a positive day on the 3rd. But does that really matter? Should we sell a bunch of December index Put options in reliance on that correlation?
Information management starts with having a strong knowledge of how things work – economics, history, and markets. Without this it is easy to get led astray by a captivating blogger who makes a compelling argument, which is not supported by fundamentals. To paraphrase Mark Twain, “it isn’t what we don’t know that gets us in to trouble but what we do know that simply isn’t true.” I’m reminded of the aftermath following the GFC when people were saying the Fed’s QE program would invariably result in a hyperinflation and a collapse in the USD. We’re still waiting. I now see that same argument being used to justify the rise of crypto-currencies.
Another unfortunate outcome of the proliferation of financial content on the internet is that we no longer have to be subjected to anyone’s opinion that contradicts our own. We can assemble a nice selection of information sources that all tell us the same thing, all of which supports our preconceived view. This is known as confirmation bias where we seek validation rather than challenge. We can feel good that we have done 3 hours of research and are confident that we are positioned properly.
Whenever I’m reading something, I always have in the back of my mind “who wrote this?” What I ideally want to understand as best I can is what their world views are – what do they believe in? Perhaps more importantly, I’m conscious about where they work as this will often result in certain biases of justification.
Rising markets are great for business on the sell side: brokers, salespeople, traders, and analysts. Life is good when the markets are rising. I’ve been there: clients are making money, portfolios are growing, management fees are increasing, clients are receptive to new ideas and ready to trade.
Given this, there’s a tendency towards perpetual optimism on the sell side. That’s not to say their opinions are worthless; it’s just important for us to remember where they are coming from.
Conversely, some prominent financial websites (and plenty of non-financial ones) have discovered that negativity is a great business model too. They load their websites with as much negative commentary and fear as they can. Again, I’m not saying that this content is all useless but it’s important for us to remember where its coming from.
So, it’s important to seek out differing views on the same thing. Even if we feel we don’t agree with them from the outset. Making decisions based on a single source of information, such as your broker/financial adviser or one web opinion, is not a good idea. Sadly, there’s often more bad news in our quest to make good investment decisions.
Psychologists have learned that humans are very poor at predicting futures that don’t benefit them. Rutgers University psychologist Neil Weinstein discovered the concept of “unrealistic optimism” by accident in the late 1970’s. For no real reason, he asked study subjects to rate their likelihood of experiencing certain negative future events such as getting divorced, being fired or getting mugged, on a scale of “below average” to “above average.” Curiously, all the responses were “below average.”
His research showed that people don’t completely reject risk – “it can’t happen to me” – they simply perceive the likelihood of a negative event as being less likely for them than others. This is the case even if they know they have the same risk factors. For example, someone may know they have the same health and risk factors as others such as family history, weight, diet and other health factors, yet they are still adamant they are less likely to get diabetes or heart disease that their peers with the same health factors.
Another example: in a 2015 Pew Research Centre survey, 65% of “average” American workers predicted that most jobs would be automated within 50 years. Yet 80% of the respondents believed their job would be safe. One more example: in November 2007, the Philadelphia Fed’s survey of professional forecasters predicted just 20% chance of negative economic growth in 2008 despite rising market turmoil and clear signs of recession.
It appears that anxiety and a desire, or even a need to be right affect people’s predictions subliminally. We only gather and synthesise information about a situation that supports the outcome we want. Neuroscience research suggests that facts supporting a desired outcome are more readily available in people’s memories than other equally relevant but less supportive information.
Unfortunately, knowing about these human tendencies is not enough to control them. Filtering out “unrealistic optimism” from our predictions is difficult because it has so many sources: our own world views, self-interest and our personal biases. The best forecasters have a way of consciously acknowledging when their assessments are being clouded by “unrealistic optimism.”
Another key trait in successful long-term investing is an ability to change your mind. This may sound simple, but to many it isn’t. We do our research, we make a prediction, we make an investment decision, we own that decision and stand by it. For many, it becomes difficult to change our mind, even if presented with alternative information. Those facts supporting the desired outcome are more readily available within our perception.
In the financial world, changing your mind is often seen as some sort of weakness. You occasionally see pundits on financial TV being chastised by the host – “when we last had you on the show you said something different.” There’s nothing wrong with changing your mind. In fact, if circumstances change and you haven’t changed your views, you could be in for a significant problem.
To pull some of the above together; I don’t necessarily believe that those economists who made those terribly optimistic predictions in 2007 are useless (some of them maybe) or were being less than honest in their prediction. The psychology shows that there is some deep unwillingness to predict bad events. Additionally, their judgement might be clouded in “unrealistic optimism” given a negative economic environment would not benefit them. They say something along the lines of “I’m not saying it won’t happen, but I consider the chances of that negative event quite low.”
Similarly, I don’t believe that every Chief Economist at every major broker is sometimes being deliberately dishonest by being almost perpetually optimistic. They find their way into those roles because their beliefs correlate with what’s good for the firm in general and they suffer from “unrealistic optimism” because a perpetually rising market is good for them, their friends and family.
It’s the same with company executives: Imagine an iron ore company executive who has a negative secular outlook for the iron ore industry. It’s almost impossible. In order to secure that job you would need to demonstrate your relentless passion and optimism for the industry. Yet investors and analysts too readily accept their bullish enthusiasm with little scrutiny, on the basis that they know their business the best.
So, I want to challenge you to review your own predictions through this lens. Deep down, we all have a relatively strong view on some things we expect to unfold this year, or next year. But do those outcomes have a sound fundamental basis. Have you read enough opposing views to challenge and hopefully reaffirm your opinion? Have you discounted those potential outcomes? Do you think you have fairly assigned the probability of being incorrect or could your predictions contain too much “unrealistic optimism?”
As long as we can answer those questions while being honest with ourselves, and we are willing to change our mind if the facts change, then we should hopefully have a very successful year.
This document contains information which is the copyright of Aviator Capital Pty Ltd (AFSL 432803) or relevant third party. Any views expressed in this transmission are those of the individual, except where the individual specifically states them to be the views of Aviator Capital Pty Ltd. Except as required by law, Aviator Capital Pty Ltd does not represent, warrant and/or guarantee that the integrity of this document has been maintained nor is free of errors, interception or interference. You should not copy, disclose or distribute this document without the authority of Aviator Capital Pty Ltd. Aviator Capital Pty Ltd does not accept any liability for any investment decisions made on the basis of this information. This information is intended to provide general information only, without taking into account any particular person’s objectives, financial situation, taxation or needs. It does not constitute financial advice and should not be taken as such. Aviator Capital Pty Ltd urges you to obtain professional advice before proceeding with any financial investment.
Register your interest in this Fund
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.