Market Comment Q4 2015
- David G Shink, CFP ®
- Jan 13, 2016
- 9 min read
Updated: Mar 27
Originally Published on January 13, 2016
The past 12 months have been a volatile sequence that has amounted to running in place. The fourth quarter was positive with a move that gained back most of the summer losses. The S&P 500 is closing out 2015 with a total return of 1.4%. For complete market coverage see
http://markets.on.nytimes.com/research/markets/overview/overview.asp
For more interesting perspective on the market in 2015 see
http://www.bloomberg.com/graphics/2015-the-year-in-money/
At the end of every year we are compelled to think about the calendar and take stock in what has happened in the last twelve months. The investor mind is so strongly attracted to neat little units of numbers, time and space. If I could have a wish for all of our portfolios, it would be that each year would be near the long term average market return. Everything would grow at a predictable pace and the stress level would drop to nil. If that was the case, then I would not need to pray for the masses of people with little or no savings as investing would be easy and we could all worry about more important things like better hair cuts, the new spring fashion, and what could be exciting to have for lunch. Not gonna happen, so let us talk, eh?
Our thinking and perspective of time is critical to the success of our wealth building process. The short term stress is a constant challenge. Historically, the long term results are substantial and the rewards of patience make all of the turbulence worthwhile. In fact, if we think about it, our wish for robust results will almost always be granted if we commit to the process of long term investing.
Thinking and judgment are the critical elements of what creates success in many areas of our lives. A crucial question one must always ask is where do our judgments come from? How is the quality of those assessments? IARPA – Intelligence Advanced Research Projects Activity conducts competitions “to dramatically enhance the accuracy, precision and timeliness of intelligence forecasts for a broad range of event types, through the development of advanced techniques that elicit, weight, and combine the judgments of many intelligence analysts.”
http://www.iarpa.gov/index.php/research-programs/ace
The Good Judgment Project is a program “harnessing the wisdom of the crowd to forecast world events”. https://www.gjopen.com/challenges
Recently, the book Superforecasting: The Art and Science of Prediction by Philip Tetlock and Dan Gardner was released and it offers great insight into these intelligence competitions and how quality forecasting is produced. The book opens with this line;
“We are all forecasters. When we think about changing jobs, getting married, buying a home, making an investment, launching a product, or retiring, we decide based on how we expect the future will unfold. These expectations are forecasts. Often we do our own forecasting. But when big events happen— markets crash, wars loom, leaders tremble— we turn to the experts, those in the know.”
The reality of prediction is that it is very difficult to develop reliable sources or procedures that can guide our tactics and strategies. Fortunately, as long term, disciplined, and patient investors, the need for prediction is reduced as we are not dependent on short term results. Tetlock and Gardner present many valuable concepts that should prove very useful in refining our ongoing thinking and decision making processes. The traits of those that have good forecasting accuracy are given by Tetlock and Gardner. These traits are powerful guidelines for investors and all of the important dilemmas that we face in many aspects of our lives.
According to Tetlock “a rough composite portrait of the model superforecaster. In philosophic outlook, they tend to be:
CAUTIOUS: Nothing is certain
HUMBLE: Reality is infinitely complex
NONDETERMINISTIC: What happens is not meant to be and does not have to happen
In their abilities and thinking styles, they tend to be
ACTIVELY OPEN-MINDED: Beliefs are hypotheses to be tested, not treasures to be protected
INTELLIGENT AND KNOWLEDGEABLE, WITH A “NEED FOR COGNITION”: Intellectually curious, enjoy puzzles and mental challenges
REFLECTIVE: Introspective and self-critical
NUMERATE: Comfortable with numbers
In their methods of forecasting they tend to be:
PRAGMATIC: Not wedded to any idea or agenda
ANALYTICAL: Capable of stepping back from the tip-of-your-nose perspective and considering other views
DRAGONFLY-EYED: Value diverse views and synthesize them into their own
PROBABILISTIC: Judge using many grades of maybe
THOUGHTFUL UPDATERS: When facts change, they change their minds
GOOD INTUITIVE PSYCHOLOGISTS: Aware of the value of checking thinking for cognitive and emotional biases
In their work ethic, they tend to have:
A GROWTH MINDSET: Believe it’s possible to get better
GRIT: Determined to keep at it however long it takes “
Tetlock, Philip E.; Gardner, Dan (2015-09-29). Superforecasting: The Art and Science of Prediction (pp. 191-192)
There is so much wisdom here. The traits are all characteristics that one can aspire to to become a better thinker. This “philosophic outlook” can greatly assist in the hyper speed information society that we live in. It is crucial that we have a strong belief system that can provide the calm and courage required in the face of fear and uncertainty.
We cannot avoid the impact that news and media have on our mind. Dramatic events have an impact that is immediate, but often short lasting in the media cycle. The competitive landscape of the current digital media landscape creates incredible pressure to sensationalize the most dramatic current story until either boredom creeps in or the next “exciting” story arrives. This urgent yet fleeting dynamic of news flow is a huge factor in the exaggeration of importance and subsequent amnesia of the very thing that seemed fascinating just days or even hours ago.
This dynamic is being turbo-charged by the ultra competitive internet driven media marketplace. The World Wide Web is a force that alters so much of how the world works. The list of industries that have been rocked or greatly impacted by the technological advances of the last 15-20 years is truly amazing:
Medicine
Banking
Advertising
Photography
Music
Retail
Journalism / Publishing
Television
Trading / Investing
Information search
Telephony and communication services
Collaboration
Video conferencing
And so many more
Information flow of extremely high velocity is available to anyone who owns even a basic cell phone and it is having a dramatic impact on our collective psyche.
Our geopolitical challenges, domestic politics, friendships and family are all being pushed in directions that were unintended and often strange. I am not sure that outspoken “social media” activists who would otherwise keep their thoughts and beliefs private are helpful to themselves or anyone else. The iconic “crazy uncle” now has a free portal to send you conspiracy theory internet clips. This is probably not a good thing for “Uncle Bob” or you. The learning curve for use of ubiquitous means of mass communication seems like it will be a slow and painful one. The things that I observe seem to continuously and gratuitously violate the valuable motherly advice, “if you do not have something nice to say, then keep it to yourself.”
Unbridled information flow beats down upon many who previously were blissfully unaware and not empowered by google news updates, 24/7 cable and internet outlets. I want to remind myself and all of us that “the media” is a broad term for production of content to either be sold or the generate traffic that can then be advertised to. That is the only way it can economically exist.
Popular media is a product that largely exists via a process that is predicated on attracting attention. When you combine that with the digital info-sphere that is rapidly expanding, investors must stay vigilant and protective of what we let penetrate and effect our consciousness. Information that we allow in our lives should emanate from diverse sources that promote broad perspective and insight (dragonfly eyes) rather than the minute to minute claptrap of what often foams out the TV and Web. Our attention span needs to be broader than what has happened in the last 72 hours or so.
As an example of perspective, let’s look at a chart of interest rates that dates back to the year 1820.
The chart of long term interest rates reveals the pattern that outside of 1970-2007 rates have been at a pretty consistent level. There is little mention of this history in the ongoing financial media fixation on our Federal Reserve Bank policy. Intense discussion and debate about how interest rates will be undergoing drastic change and what you need to do about it have filled the financial media for many years.
One chart cannot placate our fear of rising rates, but we need to have this knowledge in our baseline thinking: fears of rates spiraling upward and squelching off growth and economic opportunity are not the historical norm. This confidence offered by historical knowledge can allow us to shrug off headlines about the impending doom of a .25% rate hike. Broader views of what is happening in the economy are boring stories that generate little discussion or interest. The doom of impending Fed action is a show that can generate traffic and advertising bucks. Most of that talk is likely to be of little importance and the slow normalization of interest rates should not be of concern and will likely be of little consequence with hiccups along the way as the global economy adjusts.
Here are some of the things that get little air time, but offer justified optimism going forward:
US housing recovery continuing
Auto sales near record highs
Energy and commodity supplies in state of massive surplus and prices low (this is also cause lots of concern see chart and discussion for interesting view http://fortune.com/commodities-rebound-2016/?iid=sr-link2 )
Innovation in solar, wind, and battery technology moving at brisk pace
Declining unemployment
Huge demand for technology and other knowledge based skills
The good things that are happening gather little coverage. We can sit with confidence as we remain aware that progress is being made. Carrying the wisdom of my father Ronald S. Shink when he would bark at me and say: “what are you gonna worry about next, like the sun is not gonna come up tomorrow?” He was always reminding me that the world was not ending and that progress is likely, not doom and gloom.
Optimism can lead to feelings of gratitude, which has been shown to have even more profound effects on our quality of life.
A grateful state of mind is such a worthy and powerful goal for all of us. Our investing brain must stay particularly vigilant as the chaotic world will challenge us every step of the way. Note in the above referenced Fortune / Bloomberg chart that the S&P 500 is up 42.5% for the period 12-31-2012 thru 11-13-2015 After periods of strong positive moves our investments can push the mind onto the “Hedonic Treadmill” where all we want is more.
People are exposed to many messages that encourage them to believe that a change of weight, scent, hair color (or coverage), car, clothes, or many other aspects will produce a marked improvement in their happiness. Our research suggests a moral, and a warning: Nothing that you focus on will make as much difference as you think.
Daniel Kahneman
The whole point of this process is to create the most money possible within each of our means. Investors must seek the best outcome while keeping a rational balance of risk and reward that is suitable for our portfolios. An additional challenge is that as we make progress, the growth of a good year becomes foundation for the next stage of building wealth, our sense of appreciation declines. We come take for granted that what used to $X is now $X + 15% or whatever the numbers may be, it just will not give us any lasting satisfaction (whatever that is) and thus we will drift to fear and negativity. That is the way our caveman brain is wired. Always worrying about the next meal and water source. That is why we survived as a species. Chronic worry does not help us as investors and our task is to become better thinkers in this process that the caveman brain does not handle well.
A year of little growth is annoying and drives us to wonder what changes may benefit our portfolio. The reality is that time will solve most of the problems that we face. The market is made of buyers and sellers determining prices. This is a complex process where buyers can diminish in their appetite for equities, sometimes for reasons that are obvious and other times for factors that cannot be known. Prices can stay stagnant creating a “correction in time” meaning that we are actually having a “bear” or down market as lost time is the negative instead of falling prices. These periods of stagnant prices may allow buyers to accumulate and that can set the market up for the next stage of growth.
The challenges that are being faced in the US and global economy should not be ignored or underestimated. The polarization of American domestic politics is striking in it’s venom. The Middle East only seems to deteriorate without any signs of improvement or hope. Tension between the USA and Russia is on the upswing in troubling ways. This list can go on much longer. It is never going to be easy. The challenges to us as investors must be rebuffed in our pursuits of the rewards that will be reaped by the ownership of quality assets over time. We must continue to stand up in the face of turmoil and focus on the rewards to come.
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