Capital Asset Management, London, Investment Advice, Investing Principles, Investment knowledge, Predicting Investment

This blog discusses the core fundamentals of a sound investment strategy. We will strip away the hype to reveal the evidence behind the myth.

“Prediction is difficult, especially when it’s about the future”

Thank you to Niels Bohr for the title and what may be a piece of Danish folklore, and yet the debate about the ability of huge financial institutions and their armies of very smart analysts to be able to predict with any degree of certainty what will happen in the global economy, is still a mainstream belief.

The ability of these financial institutions (collectively the banks, fund managers, investment houses and wealth managers) to take advantage of any future market rises – or falls – and profit from them in the face of stiff competition with each other, is worth investigating.

The armies of bright people are all paid well and this comes at a great cost. In addition, their activities create additional costs that are significant, like actively buying and selling, generating commissions, charges and taxes. These costs are passed directly on to you, the investor, which obviously has a drag affect on performance and returns.

Can these clever people predict the future with a degree of certainty above the probability of luck and chance?

There are several things in life that are fairly predictable, so let’s consider two of them. Take the leading university rankings in the UK. How about the top five? It should come as no surprise that there are several independent measures available of the annual rankings, and for 2017 the results are, from first place: Cambridge, Oxford, St. Andrews, Durham and Imperial College London. You could look back on decades of results and would see the top 10 remaining stable.

What about the best-selling cars in the UK? We sourced data from 2006 and 2016 to analyse the trend over that ten-year period. Of the cars in the six top slots in each year, five were the same: Ford Focus, Ford Fiesta, Vauxhall Astra, Vauxhall Corsa and the Volkswagen Golf. The Nissan Qashqai replaced the 2006 Renault Megane.

When it comes to the global economy, there are simply too many moving parts and too many unplanned and unexpected events. As the Field Marshall von Moltke of Germany was quoted as saying – “No battle plan ever survives contact with the enemy.”

Turning to the data and evidence available, we asked Dimensional Fund Advisers (DFA) for statistics to help explain the totally random nature of global economic returns. DFA helpfully divided their data into developed markets and emerging markets.

The table below shows the top returns for the developed markets between 2006 and 2015. If you can support any evidence of correlation, please let us know. So what happened in 2016? Why not try and predict (I really mean guess) the 2016 top five countries.

In 2016 the top five countries were: Canada, NZ, Norway, Australia and Austria. Go figure.

Turning to the same results for the emerging markets we can report the same random results:

20062016
ChinaBrazil
IndonesiaRussia
PeruPeru
PhilippinesHungary
RussiaThailand

If Peru caught your eye, bear in mind that it ranked 20/20 in 2013 and 18/20 in 2015. And Russia was 20/20 in 2008 and 2014.

If, and this is a huge if, it was possible to predict the ‘winners’ for 2018 and the next 20 years, somebody would be very, very rich. Unless they kept it a total secret they would be copied, and as a direct result, their advantage would be lost. The markets would have filled in the gap.

So the next time you hear or read about ‘what’s big next year’ or ‘the hot stocks to back’ simply ignore the noise and calmly walk away.

Lesson number 1 – ‘The ability to predict the future’. At Capital we believe in the returns from the markets, not in predicting market returns.

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