University of Pennsylvania Psychology Professor Philip Tetlock has spent years studying punditry. Now, we all know who pundits are. They’re the talking heads we see plastered all over those 24-hour news channels, usually giving us their latest take on why the world is ending, when it’s going to happen, and how there’s nothing any of us can do to stop it.
But Professor Tetlock has gone beyond the smokescreen of hysterics to really analyze not only the nature of punditry, but also how effective pundits are when it comes to predicting the future. According to the good Professor, the pundits who are the most extreme in their opinions (and the most certain that what they’re predicting is going to happen) tend to have the worst track records. In fact, the predictions of the most zealous pundits have proven to be even worse than simple random chance.
Yet despite this abysmal track record, we still listen to pundits when they tell us that, this time, the world really is going to end. Take the current state of the international equity markets as an example.
If you’ve spent more than five minutes watching any of the cable news networks recently, you’ve probably seen at least one “expert” talking about how the stock market is now officially in bubble territory. This shouldn’t really come as a surprise. Since the financial storms of 2008 and 2009, the equity markets have been on a pretty serious ride up.
In early 2009, for instance, the S&P 500 dipped below 800 points. Today, as I write these words, it sits at 1,625 points. That’s quite a recovery in four short years. So it’s not exactly a shock that some people – particularly those who were heavily invested in the coming financial apocalypse – would start speculating that we’ve come too far, too fast.
Never mind the fact that, when the market was at 800 points, the airwaves were filled with stories of how much worse it was going to get before it got better. One commentator at the time even went so far as to suggest that valuations were way too high in 2009, never mind today. So apparently we were already in bubble territory at half today’s prices.
Of course, as we know now, instead of continuing to drop, the market actually made quite a recovery (as it always has) on the backs of solid corporate earnings. But it’s easy to see where the “evidence” for all these doom-and-gloom scenarios is coming from. Investors who stayed in the markets have seen their portfolios double over the past few years. Unfortunately, many people decided they’d had enough of the rough ride, and got out of the market at precisely the worst possible time – when it hit rock bottom.
As a result, we currently have the lowest level of stock market participation in decades. Those who sat on the sidelines missed out on one of the greatest recoveries in the history of investing, so it’s easy to understand why they might continue to be anxious about what the future might bring.
There are also some other very serious economic challenges facing much of the world today. While the U.S. is working its way out of recession, unemployment in Europe remains at catastrophic levels. Youth unemployment is particularly troubling, with countries like Spain seeing more than 50% of their young workers unemployed. Investors can’t be blamed for looking at issues like these, and wondering what their impact might be.
Against this backdrop, however, is a changing economic landscape, which is poised to reshape the global economy as we know it. Growth in the emerging market economies is lifting millions of people out of poverty every year. The biggest economies soon won’t be in the so-called developed world, but rather in places like China, Brazil and India. By some benchmarks, one could argue they already are.
The bottom line is, the world economy has quietly doubled over the last ten years. For the most part, that growth hasn’t been here in the developed world. It’s no coincidence that, 10 years ago, GM sold one car in China for every 10 they sold in North America. Today, GM sells as many cars in China as it sells in all of North America – and its Chinese sales numbers are growing.
What does all this mean for the average investor? For one thing, stocks aren’t exactly cheap any more. The S&P 500 Index is currently trading at about 16 times earnings, up significantly from the bargain-basement valuations we saw in 2009. But even at 16 times earnings, that puts the Index right around its long-term average. And with interest rates on bonds being as low as they are, stocks are still selling at some of the cheapest relative prices most of us have ever seen.
So why do those who predict the worst, seem to get the most airtime? Maybe because hysteria will always earn higher ratings than calm, rational facts.
No cable news network wants to hear from anyone who says that the world is too complicated to predict how anything is going to turn out, so your best bet is to be diversified, be patient – and turn off your TV. Yet those are exactly the people you should be listening to, if you choose to focus on the research instead of the hype.
There will always be lots to worry about. And there will always be people with extreme points of view trying to tell you what to do. Just remember that, the more extreme their point of view, the more likely they are to get airtime. And the more certain they are about their predictions, the more probable it is that they will turn out to be completely wrong.
It may not be breaking news, but it’s a reasonable bet that, over the rest of my lifetime, stocks will give me an average annual compounded return of somewhere around 10%*. There will be plenty of trials and tribulations between now and then. But I know that the average final result will almost certainly be right around that figure. At least, if I decide to use 200 years of history as a guide.
Personally, I’d rather rely on 200 years of proven facts, than 200 different flavour-of-the-month opinions. That’s why I’m sticking with a diversified portfolio, and ignoring the latest red alarms.
I hope you do, too.
*Source: Siegel, Jeremy J. (2007). Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long Term Investment Strategies (4th ed.). New York: McGraw-Hill.
Alan MacDonald, an investment advisor with Richardson GMP Limited, helps investors with over $500,000 of assets make smart decisions about money. Alan is the co-author of “The Copperjar System, Your Blueprint for Financial Fitness” available on Amazon.
All material has been prepared by Alan MacDonald, Investment Advisor at Richardson GMP Limited. The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP or its affiliates.
Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.
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