Dewey
Beats Truman (and Other Inaccurate Predictions)
It’s not easy being human. Just when we think
we have something figured out, reality shows us otherwise. Remember Thomas Dewey?
Most people don’t; at least not by name alone. In 1936, a Gallup poll determined
he would win that year’s presidential race by 4% against Harry Truman. Editors
at the Chicago Tribune were so
confident in the prediction that, the night of the election, they declared him
the victor in their front-page story for the following day’s issue. Oops.
Predictions and forecasts can be useful, but they aren’t always right.
Imagine all the time and money spent on industry consultants and pollsters for
this year’s presidential election. Most were taken by surprise. Thousands of experts
and millions of dollars didn’t predict the future.
Sound familiar? The investment industry has been down this road many
times before. How often have we seen stock market prognosticators and
forecasters fail miserably? Think of all the investment managers that allocate millions
of dollars and thousands of “boots on the ground” to find the next stock that
will produce superior returns. Despite all their efforts, the majority of these
guys don’t come close to beating the market.
A good example of this occurred in the 1990s with a hedge fund called
Long Term Capital Management. Its founders were top Wall Street investors and
they had several Nobel Prize-winning academics on their payroll. The group thought
they had forecasting licked and, for a while, it seemed like they did. They
averaged over 35% per year for three years! However, in 1998, they lost $4.6
billion in less than four months, which sent them into bankruptcy.
You would think we would have learned our lesson, right? Yet, not even
a couple of hours after Trump was declared the victor and all the political
experts were humiliated, this writer had 20 emails and conference call
invitations waiting in his inbox with subject lines such as: “President-elect
Trump: What Does it Mean for Investing?” The goal: to provide “tips” on how to
navigate this changing investment landscape.
CNBC has dubbed this new market shock “Trumpnomics,” which is flashing
at the corner of millions of TV screens each morning. Others are calling it a
“Trumpquake.”
Despite pollsters’ mishap earlier this month, active traders – or gamblers
– haven’t changed their tunes either. They continue to be out in full force (and
with their typical speculations about what the future holds).
The market has been responding well since the Trump win – defying pre-election
predictions that it would collapse if he became president. Investors are
expecting Trump and the Republicans to repeal the Dodd-Frank
financial regulations so they bid-up bank stocks and the financial index immediately
zoomed up 10%. In addition, due to infrastructure spending talk on the campaign
trail, government debt is expected to increase substantially; hence, bond
traders are selling U.S. bonds, driving up 10-year treasury yields from 1.8% to
2.25%. Trump also may repeal Obamacare so healthcare and pharmaceutical stocks increased.
In addition, Trump is expected to impose tariffs and encourage protectionism,
so emerging-market stocks (e.g., China, India, Brazil) have been hit hard.
Time will tell what he’ll actually do – and what Congress and the Senate
will allow him to do. In the meantime, as I always say, ignore the noise. Close
your ears and remain steadfast with our long-term, value-driven approach to
investing.
The same people who were just espousing pre-election day about how
Trump’s anti-trade, anti-immigration policies would hurt capital markets have made
U-turns and suddenly are acting bullish. What changed? Nothing really. The herd
just decided to go the other direction; probably led by some well-respected
market analyst. It’s a guessing game that astute investors should ignore. Famed
Professor of Finance Jeremy Siegel says Trump will have to be flexible because Republicans
have a smaller majority than under Obama and they aren’t united on many of his
proposals. Translation: the proposals championed
by Trump may not happen or could be altered dramatically. Consequently, these
“bets” traders are making may or may not pan out. They’re precisely that: bets.
Again, we’ve been down this road before. Remember Brexit in June?
Markets quickly recovered. Yes, the British pound has weakened dramatically,
but as a veteran of currency markets in a past life, I can tell you that this
herd mentality is stronger in the currency markets and we’re already seeing the
pound recover.
Even if Donald Trump does “Make America Great Again,” one
cannot assume that will translate into stronger stock market returns. For
example, taxes may drop, but import duties could increase. That could spark a
trade war with China, Apple’s largest market for iPhones. It’s challenging for any person or model to
account for all these variables.
What should we do? Thankfully, unlike voting, we don’t have to put all
our money on one horse.
The game of investing, like the game of life, is all about
probabilities. We take risk to achieve a goal, while hedging against the
improbable outcome. Interstate 285 in Atlanta, Ga., is one of the most
dangerous highways in the U.S. based on deaths per mile. I take this highway
weekly to get to my destination as quickly as possible. It’s a risk. I could
have a serious accident; not probable, but it could happen. I reduce the odds
of this happening by doing several things: wearing a seatbelt, abstaining from
drinking, and driving at slow speeds.
We do the same thing with investing. We try to achieve a high return
while, at the same time, avoid the improbable event. We do this by:
·
buying funds (not individual stocks)
·
investing in stocks outside the U.S.
·
investing in value and highly profitable stocks
·
investing in alternative assets
·
having bonds in our portfolio
Timing the market and forecasting trends are virtually impossible – and
a wasted exercise no matter how many people and how much money you throw at it.
However, spreading your money out among different asset classes and using
strategies backed by strong academic research will significantly increase your
odds of achieving your retirement goals. Stay invested. It should be
interesting over the next several months.
