There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.
The only function of economic forecasting is to make astrology look respectable.
– John Kenneth Galbraith
Take a minute to imagine that at the very beginning of 2020 you were able to predict major events for the next couple of years – the worst pandemic in more than a century, the consequent closing of borders across many parts of world, supply chain disruptions, and then, labour shortages and inflation (if not hyperinflation or stagflation in some countries), not to mention the conflicts in Ukraine and the Middle East.
At that moment right after your perfectly accurate prediction, it would be logical to stay as far away as possible from the stock market, right? Wrong, stocks turned out to post some decent returns in three of the next four years or so – the MSCI ACWI + Frontier Markets Index (which we regard as the total global stock market index) generated a total gross return of approximately 31 per cent in U.S. dollars and 38 per cent in Canadian dollars between Jan. 1, 2020, and Nov. 24, 2023.
What forecasters were missing here is that the stock market is a second-order system – it is not the future events but the consensus view regarding those events that matter in determining the short-term share price movement. While it is nearly impossible to forecast the macro economy (as advocated by economist Mr. Galbraith above), timing the stock market is even more difficult.
Without the ability to forecast, can investors do anything to enhance their returns? A couple of things come to our mind.
First, acknowledgment of the unknowable is already a significant advantage in the competitive stock market and offers a good chance to outperform many of those “who don’t know they don’t know.” In other words, time in the market beats timing the market. For most people, buying the index and staying invested no matter the headlines is the way to go.
Second, in terms of more enterprising investors, they cannot predict but can prepare. At HillsideWealth, we look for asset-light business models and products/services with strong pricing power to protect our portfolio from an unfavourable inflationary environment. We also seek durable competitive advantages with a solid balance sheet to enable companies to gain market shares when overall economy turns south, and shareholder-friendly capital allocators to opportunistically repurchase shares during market downturns – although we have no clue when any of these macro scenarios might happen.
Third, investors can further separate themselves from the pack by employing a long-term mindset. Did you know the average stock holding period has fallen steadily from about five years in the 1970s to less than 10 months today?
With a longer-term time horizon, those who ‘know they don’t know’ accept that all macro environments will be encountered: high interest rates, low interest rates, high inflation, low inflation, challenging and calm geopolitical backdrops, and so on. The exercise thus becomes not predicting which businesses will do well based on short-term events that can’t be predicted accurately nor consistently but rather which businesses can withstand whatever is thrown their way.
Finally, for the most energetic crowd, we think forecasting efforts would be better spent on secular trends instead of cyclical ones – simply put, focusing on what’s obvious over the long haul. For example, consumers will want to enjoy better products, and hence, the premiumization tailwind for companies like Fever-Tree Drinks (FEVR in Britain). Organizations will need to operate more efficiently, presenting long-term opportunities for digital platforms like Karooooo (KARO on Nasdaq). People will likely live longer, creating incremental demand of health care services for companies like Bioventix (BVXP in Britain).
These permanent drivers, among many others have been making our world a little better place to live from time to time, which is why the stock market tends to go up over time – another secular trend that investors should be happy to forecast.
Jason Del Vicario, CFA, is portfolio manager at HillsideWealth | iA Private Wealth Inc. Steven Chen, MBA, is global analytics associate at the firm.
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