TW3 – Rocket Man

Market Wrap

Global shares rose this week on the back of, you guessed it, hopes of progress in the trade war!

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US shares rose to all-time highs during the week, creating a new Trumpism: STOCK ROCKET!

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Australian shares also hit all-time highs during the week, despite turmoil at Westpac in response to last week’s AUSTRAC scandal. Westpac’s CEO and Chairman both resigned this week, adding to the list of bigwigs at the Big 4 banks falling at the hands of regulators – CBA CEO Ian Narev resigned in 2017 in the wake of CBA’s AUSTRAC scandal, whilst NAB’s CEO Andrew Thorburn resigned in the wake of the Royal Commission. The last man standing is ANZ CEO Shayne Elliott, let’s see how long he lasts!

Battle of the Wits

There are two ways to get above average results in investing. The first way is to have a contrarian belief that is correct, and wait until your contrarian belief becomes widely accepted (which may never happen). The second way is to correctly predict how others will behave in the near future and front run them.

Your run-of-the-mill investor will usually opt for the second method. For starters, it’s difficult to outanalyse millions of smart investors and find instances where they’re misguided. It’s also very difficult to be contrarian – contrarianism usually requires taking money off the table when it seems like everyone else is making easy money, and buying back in when everyone else has suffered heavy losses. Most investors would rather try their luck timing the markets, riding the easy gains until the party is about to end and sell, or waiting until the market bottom to buy.

As difficult as the first method is, the second method is even harder, as it requires playing an endless battle of the wits (as seen in the 1987 cult classic The Princess Bride).

Let’s say a major institution issues a report saying that investor exuberance may result in a market meltdown:

  • If everyone thinks a market meltdown is imminent, they will invest more conservatively
  • By investing more conservatively, the exuberance that was going to fuel the market meltdown will subside
  • If a market meltdown is less likely, investors will become more inclined to take risks
  • A higher risk appetite will typically result in investor exuberance, which can potentially result in a market meltdown

This is not investing, it’s speculating. Many more fortunes have been lost from speculating than have been made from speculating. Our role at Stanford Brown isn’t to turbocharge your returns, but to help you achieve your financial goals by prudently managing your money. This will often be uncomfortable in the short-term, but in the long-term it’s your best bet!

Don’t Listen to Economists

In last week’s TW3 we suggested that our readers shouldn’t care too much about what economists think. In the last few months there have been numerous headlines warning that the world’s top economists are increasingly worried about a global economic recession. It’s logical to think that if a global recession is around the corner it is a dangerous time to invest in shares – but that assumes that economists are good at forecasting.

The Global Financial Crisis was the deepest market sell-off since the Great Depression – how useful were economic forecasts in navigating this crash?

In October 2007which was the start of the GFC, the International Monetary Fund forecasted that 2008 would see robust growth for the global economy – in the ensuing 12 months global shares fell 40%.

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In October 2008 the IMF forecasted modest growth for 2009 – in the ensuing 12 months global shares rose 12% despite most major economies dipping into deep recessions (which the IMF did not predict)

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In October 2009 the IMF forecasted that growth would improve modestly – the economy would end up rebounding much stronger than expected and shares rose 15%

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Financial crises tend to cause economic recessions, not the other way around. Economists weren’t useful during the last market meltdown – chances are they won’t be for the next one!

Rock On

Uganda. Uzbekistan. Moldova. When you hear “economic complexity”, you think of these names – right?

Maybe not, but their economies are still more complex than Australia’s!

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Harvard measures the complexity of a country’s economy by the diversity and sophistication of their exports. Australia specialises in digging up rocks and hoping that someone else will want to buy them – around 70% of our exports are minerals and energy. The economic policy of digging up rocks and hoping someone else will buy them may not be particularly complex, but it’s worked wonders for decades!

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