Widely known information versus unique info is the key to understanding what moves markets.
It may seem absurd to not use economic analysis in investing, but here are a few examples of failures followed by the reason for such failure.
- In the beginning of this year, economists uniformly forecasted rising rates due to Fed tapering. Rates have so far declined making it a good year for bonds and fooling investors.
- In 2012, many advised against investing in European stocks as the euro crisis worsened and it looked like Greece would be exiting the European Union. That year, Europe was the best-performing global region, with Greece having the best stock returns.
- Harry Dent has done some brilliant analysis over the years on the aging demographics. Rarely has anyone been so consistently wrong in first predicting the Dow to hit 40,000 and later to hit 3,800. He has now had two exchange-traded funds go extinct, and I could have made some real money had I followed through on my 2009 piece launching the imaginary INDent ETF doing the opposite of the DENT ETF.
What Went Wrong?
Why did these investment forecasts fail?
It wasn’t because the economic analysis was flawed. It was because the economic information was not unique information and was widely known by the market. Markets knew that the Fed couldn’t indefinitely buy back bonds and that Europe and Greece were facing issues. And every morning I get out of bed, I realize I’m aging and that demographic information is also widely known.
Investors (and economists) confuse sound economic analysis with unique analysis that isn’t widely known. What is widely known is already priced into the market.
Following The Herd
For example, sound economic analysis will consistently show that a growth company has better economic prospects than a value company, yet value has typically bested growth.
I have a different name for investing based on common economic knowledge. I call it “following the herd,” and we all know how that typically turns out.
So while I believe in broad diversification and rebalancing, if you do want to make investment bets, try doing the opposite of commonly available sound economic analysis. And if you truly have an economic insight not widely known, don’t tell everyone about it.