Here are three of the things we recommend you take with a pinch of salt (the last one is our favourite).
Thing 1: GDP as reported in the news
You might have heard news stories about Britain’s GDP or economic output rising or falling, and be tempted to draw conclusions about how it affects the stock market.
It doesn’t! There is no correlation.
Anyway, by the time world economic news reaches you via the media, the markets already know about it and have made whatever adjustments they are going to make.
Don’t just take our word for it.
Dimensional Fund Advisers Ltd did a study of equity returns compared with economic growth in developed markets (1975-2014) and emerging markets (1995-2014). Here’s their conclusion, as published in August 2016
The relation between economic growth and returns in the historical data has been shown to be weak…The evidence suggests that differences in GDP growth contain little information about differences in stock returns in the same year and over the subsequent year. This means that it is difficult for investors to earn excess returns by relying on estimates of current or future GDP growth.
If you’d like to read the full report, please let us know.
Thing 2: What so-called pundits say
The media is swamped with experts whose job it is to comment on the recent past and foretell the future. You might get the impressions that you are receiving privileged insights.
But you’re not.
Forecasts are just someone’s opinion. They’re only human. It’s OK to ignore their advice.
For a study published in 2005, Philip Tetlock of the University of Pennsylvania gathered over 80,000 predictions from 284 ‘expert commentators’. After 20 years, Tetlock found that they performed ‘worse than dart-throwing monkeys’. His conclusion was that people develop an enhanced illusion of their skill and become over-confident, and wrote:
“The more famous the forecaster, the more flamboyant their forecasts.”
They fail, because the world is essentially unpredictable. As Daniel Kahneman writes in his book Thinking Fast and Slow:
“Everything makes sense in hindsight…The illusion that we understand the past fosters overconfidence in our ability to predict the future.”
He notes that few stock pickers manage to beat the market consistently:
“The evidence from more than 50 years shows that the selection of stock is more like rolling dice than playing poker.”
Research by Terry Odean and Brad Barber at UC Berkeley found that individuals tend to buy stocks that are in the news, then sell ‘winners’ and hold on to ‘losers’. What’s more, they found the most active traders achieved the worst results, and those that traded the least achieved the best results.
When you think about it, billions of shares are traded every day. Millions of buyers and sellers have access to the same factual information, but make decisions based on their differing opinions – buyers think the price will rise, while sellers think the price will drop.
Thing 3: Salted caramel chocolate
Who would have thought that caramel would be enhanced by a pinch of salt? But salted caramel is our new favourite thing. We particularly like the award-winning chocolates by Paul A Young, available from his Soho shop and online.
According to Kahneman, the illusion of skill is not only an individual aberration, it is deeply engrained in the industry.
We buck that trend.
As you know by now, Tucana’s advice is not based on subjective opinion that has a personal bias, but on objective fact. So, when we make investment recommendations for you, don’t be swayed by news stories or punditry. Sit down, eat some chocolate, and stick to the plan.