Mark Hulbert
The global elite reacts to yesterday’s news just like us
The biggest risks to your portfolio are those that no one is paying attention to.
This fundamental truth is too easily forgotten. By the time Wall Street worries about anything, the market has already discounted it. The subsequent course of the market at that point will be determined by whether the future will be better or worse than anticipated by the initial concerns.
A discussion at the World Economic Forum in Davos, Switzerland, reminded me of this truth. The main focus of their deliberations is the Global Risk Perception Survey (GRPS), which represents what the world’s global elite thinks we should be most concerned about. Topping this year’s short-term list of ‘Global Risks Ranked by Severity’ is the ‘Cost of Living Crisis’.
There are many ironies in this ranking. Objectively, I think you would agree that inflation was a big investment risk a year ago. As we now know, it was about to get much worse than expected. %, which was only a third of the actual result.
Despite this, the ‘cost of living crisis’ did not even appear in last year’s GRP ranking of ‘most serious global risks’. But certainly, in a true “close the barn door after the horse is bolted” method, it tops the rankings this year.
Another illustration of this phenomenon is the war in Ukraine. Earlier last year, Russia had already amassed tens of thousands of troops on the Ukrainian border, but at the time, few thought Russia would actually invade. “Geoeconomic Conflict” put him 10th in his GRPS Risk Rankings for January 2022. As the Russian invasion approaches her first anniversary this year, the ‘geoeconomic conflict’ ranks third in the short-term ‘Global Risks Ranked by Severity’ ranking. .
investment impact
In the past, when I’ve pointed out terrible prediction failures, many have doubled down on seeking clairvoyant guru who regularly knows what the market doesn’t know about the future. My response is that this search is a pipe dream. Wall Street is full of analysts who make a name for themselves as master clairvoyants, but none consistently live up to his/her hype.
Consider the dismal performance of so-called “macro” hedge funds. Its strategy is based on the manager’s forecast of geopolitical or economic events. As I reported on such funds in my column last fall, over the past five, ten, and twenty years, he has averaged less than half the performance of the S&P 500.
In a previous column, I quoted Howard Marks, the founder of Oaktree Capital Management, who had a long and illustrious career on Wall Street. “I don’t know everyone in the investment world, but there are only a few people I know or know who are very successful ‘macro investors. A low number of instances of something indicates that they are “exceptions that prove the rule,” as my mother used to say. ”
If consistently successful macro forecasts represent the triumph of hope over experience, our only realistic option is to bet all or nothing that any particular forecast will come true. Instead, you should recognize that the future is highly uncertain and develop a financial plan outlining how you should respond.
The biggest risks facing investors in 2023
This argument should not be interpreted to mean that inflation is unlikely to be much worse than expected, or that the war between Russia and Ukraine is unlikely to escalate into a broader conflict. is also a very real possibility.
But no one knows. That’s the point. We don’t know what the biggest risk is this year. Because that knowledge is already built into the stock price. What will affect market performance this year is whether 2023 will be better or worse than current expectations. The challenge we face from the unexpected is that it is the unexpected.
There are two kinds of predictors on Wall Street. On the one hand, someone who humbly acknowledges that anything can happen and tries to position the portfolio for what works. On the other hand, someone who blows smoke and bets all or nothing that a particular bet will come true.
Which forecaster would you like to follow?
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee for audits. You can contact him at mark@hulbertratings.com.
– Mark Hulbert
(Closed) Dow Jones Newswire
01-21-23 0757ET
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