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Don’t judge a forecast book by its cover

Alan SteelI see it’s becoming a widely held view among “experts” and other official pessimists that you can’t forecast future investment performance. So is it time to change well known investment book titles?

Professor Jeff Miller over in the US who “luckily” forecast the Dow Jones at 20,000 back when it was 10,000,  last week suggested some new titles to take into account the current widespread belief that you can’t beat average.

So In Search Of Excellence co-written by Tom Peters would become In Search of Mediocrity. Benjamin Graham’s The Intelligent Investor would presumably have to be changed to The Average IQ Investor. 

Quite a few years ago I read The Little Book That Beats the Market written by Joel Greenblatt , the US hedge fund manager who for 10 years in the 1990s returned 42% per annum to his investors before winding the fund up and returning all the proceeds to them.

He wrote the book in order that his 11-year-old son would understand it, and he gave away his process secrets saying readers just wouldn’t believe how simple it was to outperform indices. 

I suppose that book would be have to be renamed The Little Book That Equals the Market less handling charges.

Warren Buffett learned much of his skills, or luck , not only from value believer Benjamin Graham but also by following Philip Fisher’s Common Stocks and Uncommon Profits now to renamed Everybody’s Stocks and Average Profits. 

And finally there’s Buffett’s best seller The Making of an American Capitalist under its new title The Making of an Incredibly Lucky Investor.

This month marks the eighth anniversary of an article I wrote in the Daily Telegraph giving what I thought were several strong reasons why a new long term bull market was about to take place. Their readers weren’t happy for some reason. Odd isn’t it that optimism is so widely despised?

Those letters and emails I received that could be shown to ladies were of a collective opinion that hanging was too good for me, and that people like me should be locked up with the key thrown away. Luckily enough however, less than 10 days later the bull market took off and is still intact. Phew !

Eight years ago the FTSE 100 was around 3800  (now almost 7200). The Dow Jones was 7000 (now hitting 20,000). And US investor Wade Slome recently asked…is all this “Braking News” or “Breaking News”? Time to cash in or not?

Much publicised “experts” are in no doubt just as they’ve been for the last eight years. There’s a crash round the corner, according to them.  Go check their constant gloomy predictions: Andrew Smithers UK actuary who said in my presence that he wouldn’t invest in shares until the FTSE fell below 3000. Didn’t happen. 

Or take John Mauldin who has more than a million followers and sells books peddling gloom.  Eight years ago he said “All in all the next few years are going to be a very difficult environment for corporate earnings”……. And if you expect a major bull market to develop in this need yer heid examined… 

Then there’s much quoted Dr Doom himself, Nouriel Roubini, who said in early 2009: “We are still only in the early stages of this crisis. My predictions for the coming year unfortunately are even more dire.” 

But surely the best news for long term investors are the recent repeated predictions from perennial pessimist Harry Dent who has followed an accurate short term spell of optimism back in the late 1980s with wildly inaccurate annual predictions of financial Armageddon since.  And he’s at it again. However, he’s been predicting 50% crashes since 2011, so don’t panic as yet.

Apart from all that are there any reasons to be cheerful? Both here and in the US surveys (such as Gallup) show that fear is still in the air with investor confidence in stockmarkets as low as they’ve been in the last 19 years. Luck or not that’s a great sign!

But let me share this with you. One economic/investment research firm I know well has an enviable record of accurate forecasting. Like Gary Player they’ve found the harder they practise the luckier they get. It’s Ned Davis Research.

In December 2015, when it was almost impossible to find anyone positive about 2016 (presumably because 2015 had been hugely disappointing to those who say you can’t beat average,) the firm’s Tim Hayes predicted a double digit return. And produced statistics predicting the same for this year.

And if you’re lucky enough to be with the right fund managers you might even have as good a year as last year. Whether he’s right or wrong we’ll soon know.  Fingers crossed !

Alan Steel is chairman of Alan Steel Asset Management

Alan Steel Asset Management is regulated by the Financial Conduct Authority. This article contains the personal views of Alan Steel and should not be construed as advice. Do check your individual circumstances with your advisers.

This is a regular column submitted via the DBdirect service. For details click here. 


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