The forecasting season

‘Tis the season to make forecasts. As we approach the end of the year, newsroom staffing dwindles and editors look for space fillers to keep the readers happy. Yes, here come the investment “outlooks” again.

Each year at this time, the financial pages are filled with “investment outlooks” that tell us what we can expect to occur in the markets in the coming year and where the best bargains are.

Starved of news, reporters usually find there is no shortage of experts willing to share their forecasts with a public primed to believe that sound investing is all about finding a reliable crystal ball.

Of course, these features can be fun to read if you don’t take them too seriously. And they become even more entertaining a year later.

During the rocky start for global shares in January 2016, one major investment bank issued a call to investors to “sell everything”, warning of a deflationary crisis and a cataclysmic year on markets.

“Sell everything except high quality bonds,” the bank advised clients in a research note. “This is about return of capital, not return on capital. In a crowded hall, exit doors are small.”

The bank forecast a decline of up to 20% in major stock markets, a fall in world crude oil prices to as low as $16 a barrel with only high-quality government bonds showing a positive result for the year.

At the time of writing, with 2016 almost over, those forecasts look well wide of the mark. As at late November, the major US equity indices were all at record highs. The UK FTSE-100 recently hit record highs and Brent crude was near $50 a barrel.

Yet if you had known in advance the news of the year you might have imagined different outcomes, with the results of the Brexit referendum and US election confounding many media and market pundits.

Another favoured media template around the turn of the year is to come up with a list of “hot stocks” for the coming 12 months.

For instance, one popular website last December picked “three top Australian shares for 2016″—shopping centre giant Westfield Corp, digital real estate business REA Group and healthcare company CSL.

Each company had “strong management teams, defensive earnings and the kind of profit-growing business models that should be able to survive all but the most severe of economic downturns,” the website said.

Now all of that may well be true, but as at late November 2016, Westfield Corp shares were down 4.3%, CSL was 4.7% lower and REA Group was down 9.5% compared with a market return of 1.2%.

Inevitably with these lists, some stocks will do well, while others will do poorly. Without seeking to denigrate the abilities of forecasters, it is a tough job to consistently outguess the market. It’s even tougher when your picks come out of a media list that many other people are reading.

In any case, a small portfolio like this is likely to be unnecessarily concentrated and open to what’s known as idiosyncratic risk—influences related to individual companies and sectors.

For instance, another news outlet picked a UK-based financial services company as a possible “currency play” for 2016, saying it might benefit from the Australian dollar weakening against the British pound.

Well, that might have been a good idea at the time, but the AUD actually rose nearly 20% against the pound year-to-date, the appreciation accelerating after the UK’s vote to leave the European Union.

Another stock in that list, James Packer’s Crown Resorts, ran into trouble in October when Chinese authorities arrested 18 of the gaming giant’s staff as part of a crackdown on illegal gambling in China.

So you can see that investing based on forecasts about individual companies is extremely difficult because you have to take into consideration so many moving parts and future events (that are by definition unexpected).

A better approach is to diversify as broadly as possible across stocks, sectors and countries so as to lessen the influence of any one company, sector or jurisdiction.

Diversification is an antidote to avoidable risks like holding too few securities. It can also save you from missing opportunities. Neither list cited here included Fortescue Metals Group (up more than 200% YTD), Bluescope Steel (up more than 100%) or Worley Parsons (up 85%).

By broadly diversifying, you’re taking the guesswork out of investing and saving yourself a whole lot of time scouring the investment pages for stock picks.

Most of all, you’re more likely to have many happy returns.

This article was originally written by Jim Parker, Vice President of DFA, guest contributor to Baharian Wealth Management’s Think Tank

If making money is easy, why aren’t we all rich

easy money

I remember as a young kid watching Scrooge McDuck diving in and out of his Money Bin, overlooking the city of Duckburg. You know, the volt full of gold coins and jewels. If you don’t know Scrooge, he’s the uncle of Donald Duck, and grand-uncle of Huey, Dewey, and Louie. Within the fictional ‘duck universe’, he’s the worlds’ richest person.

Although the cartoon portrays McDuck as a greedy miser, to be fair, McDuck is a hard-nosed businessman, has a sharp mind, and is always ready to learn new skills. This part of the equation isn’t widely known, yet it’s the most crucial.

One of my favourite writers is Jonathan Clements. I really enjoy reading his work. There’s no gibberish. No over complicating ideas. Best of all, he tells the truth. Having said this, I don’t always agree with his point of view.

His latest blog struck a chord with me, because it’s something that me and my firm are so passionate about. Bringing the truth to investors. Bringing an objective view point without any allegiance’s or obligations. Here’s his latest blog:

REAL ESTATE SEMINARS. Initial public stock offerings. International lotteries. Hedge funds. Franchising opportunities. Penny stocks. Multi-level marketing companies

This is the American lexicon of easy wealth—and yet the only people who seem to end up rich are those who peddle this nonsense. It’s the story of the California gold rush: Riches accrued not to the miners, but to those who sold them shovels, picks, pans and other supplies.

To be sure, hollow promises and empty hype are rife in other areas of our life. Just check your spam folder for the latest phony diet, male enhancement and nutritional supplement.

Still, the world of money seems especially prone to such garbage. If the financial stakes are low enough, I’m not much bothered. Arguably, if you buy a $1 lottery ticket with an expected payout of 50 cents, you’re getting good value—because, in return for the money lost, you get the chance to dream briefly of riches.

But much of the time, there’s far more than $1 at stake. Real estate seminars can cost $25,000. Hedge funds often charge 2% of assets, plus taking 20% of all investment profits. The psychic pleasure of dreaming a little couldn’t possibly match the price paid.

You might argue that, if the buyers are so naive, they deserve to be separated from their hard-earned dollars—and I might agree, if a thorough understanding of personal finance were required to graduate high school. But as things stand, I find myself horrified by the shameful fleecing of the ill-informed.

The prosaic reality: For the vast majority of Americans, the only sure road to riches is socking away one dollar after another, month after month, year after year. Nobody’ll pay you $25,000 to deliver that seminar. But it’s the truth.

Whether it’s ‘duck universe’ or the world you and I live in today, we overlook the 16 hour days, the relentless training, the constant desire for improvement that occurs behind the scenes, the 10 years to become the overnight success.

Hard work, persistence, and patience, I believe are the three keys to success, whatever that may look like to you. Whether it’s personal success or financial success. I don’t believe there’s an easy way to achieve the things that are so important to us.

Scrooge McDuck famously once said:

That’s the problem with you young scallawags of today…you expect to start at the top instead of working up from the bottom, like I did!

scroogemcduck_comic

If making money was easy, we’d all be rich.

Source: Jonathan Clements

The banks suck at picking stocks. Here’s why.

It’s a Sunday afternoon, you’re chilling out at a friend’s bbq, the sun in shining (you’re obviously not in Melbourne), and of course, the conversation moves to investments. You’re buddy tells you about the latest tip he’s getting from his bank. Let’s call this bank Soldman Gachs. It’s difficult to ignore these bets by such a powerful investment bank. I mean, who are we to question these recommendations by the know it all “smart money”? So, what do you do? Take the tip, or grab another beer?

Lucky for you, the good folks at InterTrader have done the grunt work. They’ve taken all the recommendations made in 2015 by the top 16 investment banks, and analysed all the data. They’ve analysed the potential returns as well as the accuracy of their bets.

The results…well, let’s just say they’re underwhelming.

Let’s say you took all the bank’s advice in 2015, holding each recommendation until the end of the year. Here’s what your position looks like (click for larger image):

picking stocks

The bank’s accuracy was 43%, and your total gain was -4.79%.

If you had simply bought and held the index, you were 4.10% better off. In fact, if you had simply left your money in the bank, you could have been even better off. You could have flipped a coin and would have been more effective than taking these tips.

Next time you’re going to take a stock tip, please think really hard about what you’re doing and why. Here’s friendly reminder of some of the calls pundits have made over the last six years (click for larger image):

stock picking

Stock market wins again. Thanks for playing folks.

Source: InterTrader, Visual Capitalist, Trade Navigator