Forecasting variables, such as where stock markets will exactly end the
year (impossible), what GDP will be (subject to multiple revisions), is an
exercise in futility. History shows a horrific track record here.
The issue is that the world is not that perfect. How can we expect our
models to offer such precision? As the prolific British writer G. K.
Chesterton (known as “the prince of paradox”) observed in 1908:
“The real trouble with this world of ours is not that it is an
unreasonable world, nor even that it is a reasonable one. The commonest
kind of trouble is that it is nearly reasonable, but not quite. Life is
not an illogicality; yet it is a trap for logicians. It looks just a
little more mathematical and regular than it is; its exactitude is
obvious, but its inexactitude is hidden; its wildness lies in wait.”
Why then is forecasting such common practice? In short, people crave
certainty. This danger lies in the illusion of safety that this false sense
of precision creates. Overconfidence results and portfolio mistakes are
One of our favorite concepts over the years has been Andrew Lo’s
observation that the financial industry suffers from “physics envy.” We
want our models to be as predictive as those in physics, but there is a
behavioral element to finance that cannot be modelled. Humans can be
capricious, and what’s right in one regime will be wrong in the next. As
one physicist remarked, “Imagine how much harder physics would be if
electrons had feelings!”
Not all is lost. Rather than playing the mug’s game of point-forecasting
all these variables, we strongly believe
it is the macro themes that matter. Of course, forecasting these super trends (as we call them) is not an
exact science. We are looking at a range of possibilities and positioning
portfolios for the probable environment ahead. This is one part
fundamentals (where we are in the cycle, valuations, etc.) and one part
behavioral (where the consensus thinks we are in the cycle, levels of
euphoria or complacency, fund flows, etc.).
In the post-crisis environment since 2008, it has been critical to have
this type of disciplined process. Ed Yardeni has counted 57 so-called
“panic attacks” in this 8.5-year bull market (taper tantrums, Brexit,
etc.). At panic points, it is always useful to revisit the role of the
portfolio manager: Why do clients pay us to manage their wealth? It is not
for flawless clairvoyance. Rather, we are paid to anticipate probable
risks, prepare for opportunities and, importantly, not lose our proverbial
minds when everyone else has lost theirs. That requires a disciplined
decision-making framework that can extract emotion from the process.
Forstrong’s investment team remains committed to this approach.
Tyler Mordy, CFA, is President and CIO for
Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities
selection. He specializes in global investment strategy and ETF trends.
This article first appeared in
Forstrong’s Gobal Thinking feature. Used with permission. You can reach Tyler by phone at Forstrong
Global, toll-free 1-888-419-6715, or by email at
. Follow Tyler on Twitter at
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