Third Quarter 2014 – “The Great Temptation”
Looking across time at the intricacies of human behavior, it is quite common to run into fixed mindsets that put undue weight on present facts and circumstances. Yet, this trait is not universal as some have been able to foresee change either through creativity and/or a deep understanding of the past. The rare few that comprise this group are justifiably held in very high regard, although not immediately, as their point of view may initially seem implausible or even insane. Yet, when viewed through the lens of history, accurate predictions of great change in society, technology, geopolitics, etc., are valuable and revered for generations.
In the world of financial markets, dramatic shifts also occur over time – these shifts typically involve both the structure of markets and pricing dynamics, with most investors being quite keenly interested in the latter. Nevertheless, despite a massive oversupply of forecasters, very few are able to predict the direction of prices with any level of consistency. Still, one should never discount our tendency to remember the rare successes, such as the investor that sold technology stocks before the bursting of that bubble in the early 2000’s, or the investor that bet against low-quality mortgages shortly before the Global Financial Crisis.
As we recall these remarkable successes, it is only natural to seek to replicate them for ourselves. As equity markets generally march higher, the temptation to introduce short-term forecasting into the equation justifiably grows. Yet, one must question whether we would pursue such an approach if we could precisely measure the odds of success and also quantify the impact on our long-term goals if we are proven right or wrong. Our guess is that most investors, armed with this information, would be driven back to the imperfect, less exciting brand of investing that we espouse, which is to base all decisions on long-term outcomes with portfolios that are tailored to their owners’ respective goals and risk tolerance levels.