Folly of forecasting: The best investing blogs and podcasts this week
Quite some time ago, when I first started writing about stock markets and strategies, one of the writers never off my required reading list was an analyst who liked to ponder all the reasons why investors are their own worst enemy.
Given that he was on a team advising clients how to allocate money, that might sound like a provocative approach. Perhaps it was. But in his regular research notes, James Montier unpacked all the reasons why humans make bad decisions, especially in finance and investing. And by the time he’d compiled them into the very readable Little Book of Behavioral Investing, it was a message that resonated with professional and private investors alike.
Of all of them, one of my favourite notes dates back to 2005 and it’s called “The folly of forecasting: Ignore all economists, strategists, & analysts”. As the title suggests, it explores why the asset management industry is so obsessed with making forecasts when its track record of doing so is atrocious.
In short, Montier said, the reason why forecasts are so inaccurate is that analysts are overconfident. And the reason why investors use them anyway is down to their instinct to anchor on any available number. In sum, it’s a really rather unsatisfactory mix that makes it no surprise at all that forecasts are often faulty.
If you want to explore some of these ideas, a good place to start is Montier’s collection of notes called: Seven Sins of Fund Management.
As a dyed-in-the-wool value investor, Montier, like many others, spent more than a decade after the financial crisis rueing ever-frothy valuations, especially in US equities. Back in early 2020, when the market momentarily collapsed, he wrote a note (here) about how difficult it is for anyone other than dedicated value investors to enjoy those kinds of sales in the stock market. Not unlike the one we’re witnessing now.
Until recently, value, as a style, went an unusually long time without working consistently. For value purists, there’s almost a sense of redemption that it’s started working again over the past 18 months. It’s confirmation that the theory is still alive.
But there’s theory and then there’s practice.
From a practical perspective - by which I mean using a value strategy to build wealth for yourself or someone else - does a reversal after such an extended dry-spell really equal a genuine victory? While the concept might still be a go’er (and surely always will be) isn’t it also true that the investors who might benefit have long given up waiting? Having realised how out-of-favour value can get - and how much money they’ve lost in the meantime - they’re long gone and might be hard to tempt back quickly.
This kind of argument, of course, has always been presented as a reason why value will always work: you need the stomach to hold on until it comes good. But when it really does stop working for so long - and ends up destroying wealth - the question is how practically useful is it?
These ideas (and others) are some of the stop off points in a trilogy or articles this week from another analyst, Joachim Klement of Liberum. In The Hitchhiker’s Guide to Investment Research, he takes a philosophical tour of some of the frustrations of investment management, including the madness of obsessing about earnings growth, finding no meaning in economic theory and being stubborn about the usefulness of models.
I’ve borrowed this chart from Joachim’s third post, which covers the frequency of ‘value’ outperformance over the past 50 years:
Source: Joachim Klement, Liberum, Ken French Database
Given that most of us don’t work in professional asset management, some of the observations here are very revealing, and in some ways surprisingly reassuring.
You can catch up with it all here:
Part 1: Busy Fools
Part 2: Theory vs Practice
Part 3: Time is Money
Six posts from the past week
Quality Share Surfer - Portfolio Review: July 2022
I think it’s fair to say there’s been a fast growth/ high quality feel to Quality Share Surfer’s portfolio over the years - and the blog has been around for over five years now. If you’re looking for a really honest all-cap investing journey, with holdings updates and a perspective on the market then I think it’s really up there as one of the best. This week’s portfolio review will echo the feelings of many - upbeat with a heavy dose of caution.
Excess Returns Podcast - What is the One Lesson You Would Teach the Average Investor? Ten Great Investors Tell Us
The Excess Returns podcast from US investing blog Validea wraps up every episode by asking guests for one lesson they would teach the average investor. This week they summarised some of the best responses from 2022, with guests including Wes Gray (Alpha Architect), Cem Karsan (Kai Advisors), Jack Schwager (Market Wizards), Gary Antonacci (Dual Momentum), Ben Hunt (Epsilon Theory), Meb Faber (Cambria), Adam Butler (ReSolve) and others. If you want 50 minutes of investing expertise, this is definitely the podcast for you this week.
Morgan Housel - Tails, You Win
This post from Morgan Housel is all about the importance of the long tail - in just about every aspect of life (and certainly in investing). Warren Buffet once once said he’s owned 400 to 500 stocks during his life and made most of his money on 10 of them. In essence, big successes are born from a long tail of average performance. When you look through this lens, you can see why diversification and a long-term view are such important components in investing.
We Study Billionaires - TIP466: The Bear Has Arrived w/ Jeremy Grantham
Jeremy Grantham, the co-founder of asset manager GMO (and employer of James Montier, see above), has been yelling about a massive bubble in US equities for a while now. This year has seen some of his predictions come true, so it’s an ideal time to hear a catch-up with him. Equities have actually been in a reasonable uptrend over the past month, but Grantham remains convinced the downturn will continue.
Business Breakdowns Podcast - DuPont: Two Centuries of Chemistry
Business Breakdowns is just that - a regular dive into what makes some of the world’s most influential companies work. In this episode, Morningstar analyst Seth Goldstein joins host Matt Reustle to explore one of the best known specialty chemicals companies in the world: DuPont (NYSE:DD). With early beginnings in explosives, the firm went on to develop household names like Nylon and Kevlar. Today it specialises in a handful of industries and has some notable moat-like strengths. If you’re listening along and wondering how UK-quoted speciality chemicals stocks stack up, I’ve created a quick screen list to help (sorted by operating margin):
Alpha Architect - The Expected Returns to ESG-Excluded Stocks
According to Bloomberg, ESG assets are on course to exceed $53 trillion by 2025 - representing more than a third of the projected total assets under management ($140.5 trillion). But this explosion of interest in ESG could conceivably have some blowback for valuations. For a geeky dive into some of the research in this area, this post from Larry Swedroe is worth a read. It turns out the upside for sin stocks could actually improve as a result of the growing popularity of ESG.
Have a great weekend!
Ben
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