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SMSF Strategies

Beware selective memory

16 May 2022 1 month(s) ago

Fund managers and analysts are sales people first and truth tellers second

When listening to financial analysts it is a good rule of thumb to see how good their memory is. The finance sector has a powerful reason to have a selective memory. Errant forecasts are quickly swept under the carpet.

The fact that fund managers cannot anticipate the future with any precision is quietly kept secret, concealed behind a blizzard of complex numbers, mystification and dubious explanations of unpredicted circumstances.

The excuses are delivered in a profound tone, often commencing with: “we didn’t anticipate or expect” such and such to occur. Investment and markets are forward looking not backward looking. Successes are exaggerated, and it is not mentioned that last year’s top investment manager is, on the balance of probabilities, likely to be next year’s underperformer.

As one high profile investment fund manager whose strategy is not based on anticipating the future explains, the idea that you have to get predictions right is misleading. His method is based on the work of the economist Eugene Fama, who argued that whatever the price in the market is it reflects collective knowledge that should be considered the first point of call.

Put another way, if you think the market has got it wrong, then you are saying your insight is better than the collective thinking of millions of others. That may of course be the case, but it is something worth remembering for a touch of humility:

“The bad news for investors is that forecasts cannot be trusted. They are rarely accurate, and, when they are, it is frequently more a matter of luck than insight. The good news is that it is not necessary to forecast accurately in order to have a successful investment experience.

“Investment is not like making bets and hoping you can pick the future correctly. It is about coming up with an enduring philosophy and strategy and staying with it. It is not necessary to waste your time trying to pick stocks and forecast markets, gaze into crystal balls or work out which analysts are better than others. That is a fool’s errand, because the best analysts today are almost invariably the worst analysts tomorrow.

“Rather, it is about remembering what matters. The need to at least capture the average capital market returns, to understand the nuances between risk and return, the importance of diversification, the importance of asset allocation, the importance of focusing on maximising the probability of achieving cash flow and the requirement to create enough revenue to support your living costs.

“The purpose of investing is not, in the first instance to get a good return. That is only the outcome of investing. The purpose of investing is first to understand yourself and your preparedness to accept risk, and then to craft an approach based on expected returns, time horizons and cash flow requirements. How is it possible to invest in a way that you never have to feel bad about the decisions? What can, and should you, control and what necessarily remains outside your control?”

Another thing fund managers do is try to become geopolitical commentators, which is very hard to meaningfully interpret. One thing you cannot control is international events. But it gives them an aura of authority.

An example is Ned Bell is Chief Investment Officer and Portfolio Manager at Bell Asset Management, interviewed by FirstLinks:

“If you think about the environment, what's on the whiteboard for this year … the highest inflation since the 70s, a raging war in Europe, a rapidly decelerating China which has accounted for a large proportion of global GDP growth in the last 10 years. The gap between GDP growth expectations for emerging markets (EM) versus developed markets has shrunk to the smallest in 20 years plus. It’s a monumental turning point. Investors in EM markets must ask themselves, if the whole reason for being there in the first place is to capture a growth premium and it's no longer there, then why are we still there?”

Such analysis can be first class but that does not necessarily mean it helps you predict where things are going. As the economist Keynes famously said the markets can stay irrational longer than you can remain solvent.

 

Reader note: This is general reporting only and should not be considered in any way to be investment or tax advice. It does not take into consideration the investment objectives, financial situation or particular needs of any particular investor. For more information please read our disclosure statement.