Weekend reading

Good reads from around the Web.

Two excellent pieces this week on the pointlessness of trying to predict where economies or markets are going – even if you’re engaged in active investing.

On the first point, Nick Kirrage of the Value Perspective served up a thought experiment:

[Imagine it’s January 2009 and…] I am prepared to answer any macro question you want to ask. Then you can decide on your investments and, rather than waiting five years, I will give you a lift in the time machine and we will see how you have done.

“Fair enough,” you say. “What happened to house prices?” “Well,” I reply. “We saw a really nasty step down and then they pretty much went sideways for five years so, in real terms, you lost maybe 15% or 20%. Things have been picking up a little bit recently but they are still not great.”

“All right,” you nod. “What happened to banks?”

“Well, it hasn’t been pretty,” I reply. “There was the personal protection insurance mis-selling and Libor scandals, the euro was on the brink of collapse for much of the period and we saw a double-dip in the UK economy that almost turned into a triple-dip. At the risk of repetition, things have been picking up a little bit recently but they are still not great.”

“OK, last question,” you say. “What about the consumer and the high street?” “Basically, it has been a series of insolvencies,” I reply. “Blacks, Comet, Peacocks – just one business after another. The consumer has been trying to pay down debt but has not really managed it and is still very much in the red. No two ways about it, it has been brutal.”

It’s very unlikely that you’d have bought shares – especially housebuilders, banks, and retailers – based on that hypothetically certain forecast.

Yet many companies in these sectors have delivered superb returns since then and the FTSE 100 is up 70% or so, with dividends. Only paying attention to the fear prevailing in the market and the consequently cheap valuations could have helped you from a timing perspective.

Morgan Housel makes a similar point for the US Motley Fool, urging investors to stop paying attention to useless numbers:

One of the most dangerous things you can do is pretend the economy, or the stock market, is simple and easy to understand. It causes you to see patterns that are really just random flukes, and wrongly assume that if one lever is pulled over here, something predictable will happen over there.

This is one reason clueless, passive investors often outperform professional ones. Clueless investors aren’t tempted by false-insight masquerading as brilliance.

For most people, passive investing via index funds is an easy way to avoid the traps of market timing, misreading the runes, or reading stupid permabear-ish blogs that will one day be right, only in the same way Cliff Richard gets a hit single every two decades.

And for those of us silly enough to try our hand at stock picking (like me) the lesson is clear. Study businesses, not chicken entrails, and treat Nouriel Roubini and the rest of the professional prognosticators as court jesters rather than wise sages.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Tesco Bank now pays a table-topping 2.05% on savings, fixed for 18 months. True, this feels a bit like me topping the winner’s podium at the Olympics based on a wheezing jog around the local park, but at least the fixed term is short.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • 10 tricks that will help you beat most investors – Forbes
  • Run a balanced portfolio on auto: More evidence – MorningStar

Active investing

  • Should you buy shares in Twitter? – Morningstar
  • Don’t fall for cold calls and other investing scams – Guardian
  • Five ways to invest in solar and renewable energy – ThisIsMoney
  • Words that should be banned – Terry Smith/Telegraph
  • Why you should always back your friends’ startups [Video]B.I.
  • When risk is [dangerously?] sticky – FT Alphaville

Other stuff worth reading

  • Why does Sweden have so many billionaires? – Slate
  • Bankers or bakers? [Search result]Tim Hartford/FT
  • Random stuff happens. Don’t over-react! – N.Y.Times
  • ‘Passivehaus’ and £20-a-year heating bills – Guardian
  • Save or spend: Some couples share their budgeting – Guardian

Book of the week: I bought a copy of Conscious Capitalism this week to try to win back a friend who has started to see the invisible hand of the market as the rogue limb of a strangler. It’s an inspiring book, if you can push through the American-isms.

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  1. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.”

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