A year ago, a global financial luminary looked at 800 investment professionals gathered at the Palais des congrès in Montreal and issued a warning.
“The stock market,” she said, “is on a roller coaster ride that will lead nowhere. In a year, the S index
We will never know how many participants adjusted their clients’ portfolios to reflect this prediction.
What we do know is that 12 months later, that statement from Lisa Shalett, head of wealth management investments at Morgan Stanley, has not come true.
About a year earlier, in the fall of 2022, forecaster François Trahan had stressed many Quebecers by announcing an “apocalyptic” economic situation for 2023 and 2024.
But there hasn’t been an apocalypse – not yet, anyway.
In September 2023, Mr. Trahan again spoke of a 35% drop in S
Like most investors, I accumulate investments. A drop in the market is therefore to my advantage: I would dance a jig in a Scottish kilt on the corner of Peel and Sainte-Catherine live on TikTok if the markets gave us the gift of a 50% drop.
Unfortunately, corporate profits and stock returns have only risen since Mr. Trahan told us that the worst is upon us.
People who make predictions are not incompetent. On the contrary, they are some of the greatest experts in finance!
And yet, the future of the markets is inaccessible to them.
Why am I telling you about this? Because if we want to have any chance of success with our investments throughout our lives, we must train ourselves to ignore the opinions of forecasters.
It’s easier said than done.
I can’t guess the future. Probably neither do you. So when an expert speaks to enlighten us, our reflex is to listen.
But consistently predicting the short-term future of markets is like teleportation or alchemy: it doesn’t exist.
Nobody knows what’s coming. It’s that simple.
In the extreme, even the impact on markets of events as terrifying as a world war is impossible to anticipate. Stock markets in developed countries fell during World War I, and (except in Germany) rose during World War II.
If the short-term direction of markets were predictable, forecasters would be the richest people in the world – they would make money like water.
The forecasters would travel by private jet to their Caribbean island to receive massages and eat organic grapes washed and polished one by one by an army of servants paid $200,000 a year.
Bloomberg Financial maintains the Bloomberg Billionaires Index, a list of the world’s 500 richest people.
For each billionaire, Bloomberg notes the industry in which he or she operates. Many come from the technology, retail, energy, industrial products and raw materials industries.
Exactly zero billionaires listed by Bloomberg made their fortune as an economic forecaster.
It is not new that the future escapes forecasters.
In the 1950s, Benjamin Graham, a professor at Columbia University in New York, examined the accuracy of predictions made by analysts and other market experts.
More recently, the firm CXO Advisory Group analyzed more than 6,000 predictions about the growth of the American stock market issued by 68 experts cited in the financial pages of major American daily newspapers from 2005 to 2012.
The result: the experts were right 47% of the time, essentially the “heads or tails” that Benjamin Graham spoke of 50 years earlier.
If predictions are unreliable, why do people continue to make them? And why do we listen to them? Benjamin Graham had his idea on this.
“Almost everyone who is interested in the stock market wants someone to tell them what they think the market is going to do,” he noted. The demand being there, it must be filled. »
Predictions would be benign if they had no impact on our behavior.
The problem is that we are fallible beings, especially when it comes to money. We may have the best intentions: a dark prediction launched by a luminary can make us doubt everything.
For example, we could decide to sell our investments as a precaution. Or to stop investing while you see where things are going.
A person who receives a large sum, such as an inheritance, might also refrain from investing it for fear of entering the market at the wrong time.
These behaviors may seem logical. Responsible, even. But it’s a trap: in reality, they can ruin our finances.
For what ? What’s wrong with erring on the side of caution?
It’s counterintuitive, but all of the long-term growth in financial investments comes from just a handful of great days in the markets. Missing these few days means being condemned to poor returns, or even long-term losses.
These exceptional days arrive without warning. And, to complicate matters even further: they often occur during periods of stock market decline – where it is tempting to sell to regain calm.
Here’s what an initial investment of $100,000 in the Canadian Stock Exchange would have yielded from 2000 to 2021 if we had missed the best days of the market.
This is the cost of listening to forecasters, and trying to synchronize with the markets.
Billionaire investor Warren Buffett understood this a long time ago.
“People who make economic predictions will fill your ear,” he said. But they will never fill your wallet. »
