Rolling dice or playing poker?

According to today’s Financial Times, “The Bank of England signaled it was likely to pump billions into the economy, after slashing its forecasts for inflation on Wednesday and saying output was likely to stagnate until next summer.” (my emphasis)

Financial markets around the world seem to be predicting poor results for the foreseeable future. Fortunately, nobody is any good at forecasting so we can completely ignore the doom mongers.

Also, data from around the world shows that there is no direct link between poor economic results (GDP) and investment returns (such as stock markets) in the short term. Of course, investment markets will perform badly if economies falter indefinitely but there is no way to predict either the short or long term, even though many investment professionals think they can do so.

In a recent New York Times article Daniel Kahneman of Princeton University, and winner of the Nobel Prize in Economics, showed conclusive evidence of “over-confidence bias” in practice. The article is a fascinating read and gives real insight into how investors and markets behave.

Remember that when someone sells an investment, whether Shares, Corporate Bonds or Government Bonds (including those of Greece, Italy, Spain, France or the United States) someone else buys it. The person selling thinks the asset is overpriced and the person buying it thinks it is under priced – they can’t both be right!

Kahneman points out that “The subjective experience of traders is that they are making sensible educated guesses in a situation of great uncertainty. In highly efficient markets, however, educated guesses are not more accurate than blind guesses.”

He also observes that “for the large majority of fund managers the selection of stocks is more like rolling dice than like playing poker”.

The article also shows that investors trade too much but the most active traders perform significantly worse than the least active traders. In fact, the vast majority of investors would have “done better by taking a nap rather than acting on their ideas”. Perhaps most contentiously he shows that women make better investors than men.

So go on, read the article then get on with living your life, or just take a nap. Whatever you do stay calm, the current storm will pass like others before it.

2 Responses to “Rolling dice or playing poker?”

  1. Peter Christy

    The first 2 paragraphs really speak to my condition. How can we get round the media desire hype up the gloom and doom stories based on various forecasts, particularly the gloomy ones.

    Reply
    • Alan Dick CFP

      Alan Dick CFP

      Hi Peter,

      Unfortunately, there is no easy way to get round the doom and gloom forecasts we just need to rise above it!

      People have been forecasting the end of the world for centuries but we’re still here.

      As Bobby McFerrin would say”Don’t worry be happy”

      Alan

      Reply

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