An Exercise in Humility...and a Promise

As 2017 comes to an end, so now begins the painful process of self-examination amongst Wall Street’s finest prognosticators. I entered this industry as a management trainee with Paine Webber in 1983 (ugh). Since that time I have noticed that Wall Street engages in a tortuous ritual where market experts make predictions on how various markets will perform in the coming year. I don’t recall when the financial print media actually began tracking and holding them accountable but it took far too long. And it doesn’t appear to have spread to the financial news shows on TV – the same tired hacks keep shooting their mouths off while the networks pay scant attention to their track records. I mean, what’s the media for?

The Wall Street Journal is in an interesting position: kudos to them for writing about these predictions and tracking them (Wall Streets’ 2017 Market Predictions: Pathetically Wrong, WSJ Nov. 23, 2017). But where does the Journal run to get answers to what the market “thinks” or how it will perform in reaction to the news of the day? The same folks who spew these predictions referenced in this story, that’s where. I believe this is what we call a conundrum. Last year, Wall Street predictions of where 10 year Treasury rates would be weren’t just incorrect, they got the direction wrong! Rates dropped on the benchmark 10 year, they didn’t increase. And the S&P 500 index of stocks in the US delivered more than double the gains predicted. Many called for a drop in stock prices although they tended to be colored by their political biases.

The irony in all this is that academics who have studied stock and bond prices over the past 50 years have in large part come to the same conclusion: it’s impossible with any degree of accuracy to consistently predict price movements in markets. Gee…you think Wall Street would have recognized this by now. The answer is simple, follow the money. If Wall Street and the various forms of media that enable this behavior just told investors that they should place their money in a well diversified portfolio of index funds, rebalance every few years, and stay invested come what may, they’d be out of business after a couple of years. No money in that. Now, being a successful investor can be tougher in practice than in my cheeky example but this is the essence of a competent investment approach.

With that in mind, here’s how we have come to think since our founding in 1994:

·       We believe markets are pretty efficient; they work pretty darn well most of the time. Market prices are a good indication of value. We don’t try to second guess them.

·       Use objective research from smart folks who don’t appear to have an agenda, but always treat their conclusions with skepticism.

·       Don’t get into any financial arrangements with your investment providers – keep them at arm’s length because you may have to fire them at some point.   

·       Diversification, low fees, and tax awareness above all else in investing.

·       Focus on planning and advice because in the long run, that impacts the investor experience greater than the investments themselves, provided you’re pursuing a prudent strategy.

Now here’s our promise: we’ll never ever make an attempt to predict market prices. History and economic theory tells us that there is a return on investment capital to be had from a free market. It has been on average a positive return over the last few hundred years. We expect that not to change. That’s about as far as we’ll go. Happy Holidays!