Focus. We’ve all been told this at some point in our lives, but how does it relate to long-term investor success? How can this one word potentially provide a lifetime of retirement bliss (as you define it), or a possible lifetime of headaches? To be successful, we need to focus on the Unknowable vs. Knowable. I believe this is a key to long-term investor success.
Recently, you can’t turn on the radio, cable or the Internet without the following commentary from a self proclaimed “Expert” in regards to either; The Market’s Direction, Interest Rates, Economy, Oil Prices, World Crisis, Real Estate, or Corporate Earnings. All of these areas of interest are important, but in the short run Unknowable. And this is where the focus begins to fade.
For example, the table* cited below provides the results from December of 1982 through June 2009 of the average six month forecasted direction of interest rates from economists vs. the actual direction. As you will clearly see, the economists had a tough time predicting what will happen in the short run. Important, but Unknowable.
Now you may be saying to yourself: “OK, but maybe those are the economists that often received a C or D in college.” My person is much better at prognostication than that. Fair enough. So let’s look at the track record of one of the most intelligent economists (I’m sure you’ll agree with me on this one), former Federal Reserve Chairman Allan Greenspan.
“It is rare that you can be as unqualifiedly bullish as you can now,” Greenspan said on January 7, 1973. Four days later, the Dow peaked and then declined around 45 percent.
“…there are few signs to date of slowing in the pace of innovation and the spread of our newer technologies…,” Greenspan said on February 23, 2000. Sixteen days later, NASDAQ peaked.
“I was telling my colleagues the other day…I’d been dealing with these big mathematical models for forecasting the economy, and I’m looking at what’s going on the last few weeks and I say, “You know, if I could figure out a way to determine whether or not people are more fearful, or changing to euphoric…I don’t need any of this other stuff. I could forecast the economy better than any way I know. The trouble is, we can’t figure that out. I’ve been in the forecasting business for 50 years, and I’m no better than I ever was, and nobody else is either,” Greenspan said on September 18, 2007.
You may be thinking, well this is an area that can be extremely difficult to forecast. Agreed. I hand it to any economist who attempts to make sense of all the data they have to interpret and then formulate an opinion. And the second they do, all the data changes, again.
Well, how about the direction of the markets? How have Wall Street strategists fared in the short term? From a chart** that shows Strategists Average Forecasted Market Change vs. Actual Market Change from 1999 through 2008, not only does the interest rate direction give prognosticators problems, but also trying to predict market direction has been just as challenging, according to a report from Barron’s. Again, important but unknowable.
My point is simplistic. The focus of a long-term investor (which should cover just about everyone) needs to be shifted from looking at issues that are important but unknowable in the short run to important and knowable for the long run. I will cover this in the next month’s article (I’ll give you a hint: it involves a postage stamp).