Looking at history and the long waves of demographics is a great and fine thing. It can tell you a heck of a lot. It’s frequently the case that history is driven by large, abstract, impersonal forces rather than singular decisive events. But…
…to start forecasting equity markets using these metrics is a perilous thing. And it’s becoming all the rage lately.
The problem with demographics as equity market forecasters is that, first, in order for you to be right, you might have to wait, you know, a generation or more. Also, even if you can shoehorn a theory to explain all, at best you only have a few good data points to support the correlation tied to equity markets. That’s not much to stake a +20 year forecast on.
It’s an old adage: Investors have short memories. Another: the market discounts the future.
Here’s some interesting psychological research as to one reason that may be: Yesterday came suddenly
“Because future events are associated with diminishing distance, while those in the past are thought of as receding, something happening in one month feels psychologically closer than something that happened a month ago.”
Ken Fisher and Lara Hoffmans have published their layperson’s guide to building a basic wealth plan — I couldn’t recommend it more.
Much like his other books, Ken Fisher takes a route of empowering the average investor, being less didactic or preachy and offering usable perspectives in terms everyone can understand.
In my view, it’s one of the ultimate things a skilled expert can do for us: to give his knowledge back in a way all can participate in. Ken has seen it all, done it all, and been very good at it for very long time; it’s a pleasure to read about the fundamentals of wealth-building with all the signature wit and uncommon perspective he and Lara always bring.
The investment process is only half the battle. The other weighty component is struggling with yourself, and immunizing yourself from the psychological effects of the swings of markets, career risk, the pressure of benchmarks, competition, and the loneliness of the long distance runner. – Barton Biggs
My boss Ken Fisher has been a pioneer in a lot of things: behavioral finance, the investment advisory business, to name a few of the biggies. To me, his newest book is especially important: Markets Never Forget (But People Do): How Your Memory Is Costing You Money-and Why This Time Isn’t Different (Wiley, November 2011).
So much of the work in psychology and economics/investing talk about the mistakes people commonly make in abstract terms or with lab experiments. But Ken Fisher’s book does something different: it takes many important lessons about how our minds fail (particularly our memories), and puts them in the context of market history. In particular Ken Fisher focuses on how short our memories are, collectively—how so many things we think are unprecedented actually have ample and clear precedence in our past, we just fail to remember. Psychologists call it “myopia”, “biases”, “aversions”, and many sorts of other official-sounding technical definitions.
Forget the technical terms and focus on the reality. This is a key reason to study market history carefully—it prevents you from forming false idols and notions about things that didn’t really happen the way we (you, me) remember them. Ken Fisher’s book reminds us it’s not that we simply forget (we do), it’s that we misremember routinely—brains tend to remember details based on emotion, not rationality.
Here’s a bit from a recent interview with Ken Fisher on history and market forecasting:
Ken Fisher: History doesn’t repeat, not exactly. And the past cannot predict the future, but it is one good tool in determining if something is reasonable to expect. Investing is a probabilities game, not a certainties game. Nothing is certain in investing—all you can do is determine what a range of reasonable probabilities are.
In the same way, it’s not a possibilities game. It’s possible the world gets hit by an asteroid and destroys life as we know it, but the far greater probability is no such terrible thing happens.
You can’t develop a portfolio strategy around endless possibilities. You wouldn’t even get out of bed if you considered everything that could possibly happen. Instead, as I show in the book, you can use history as one tool for shaping reasonable probabilities. Then, you look at the world of economic, sentiment and political drivers to determine what’s most likely to happen—while always knowing you can be and will be wrong a lot.
For more information on Ken Fisher’s latest book, visit Wiley’s website.
Norton Juster’s classic children’s story The Phantom Tollbooth ostensibly has nothing to do with investing and economics, yet to my view, it is foundational. I bought a copy for my 3 year old nephew the other day, and ended up reading it myself on a plane ride today.
It struck me that every economist should read and heed this story. It’s as good or better at wordplay than Lewis Caroll, but goes to greater lengths to show the distortive, squirrely properties of words and numbers, and how often they’re used to obfuscate. Aside from lawyers, few do that better than economists to both make a display of “rigor” and also to veil the inherent uncertainty and slipperiness underlying most analyses.
A snappy and fun summer read.
(Make sure to get the version with Jules Feiffer’s classic illustrations.)
Days like yesterday often give investors the yips. If you’re investing for the long term, yesterday is not a day to sweat too much. Big up years, up a little years, and down years all have big individual up and down days. Stick with your strategy and don’t let market down days yip you into mistakes.