In March 2014 The Times ran with a headline "Soros takes a bearish bet on US shares". In essence multi billionaire George Soros had put a $1.3bn bet on the US stock market going down. This is the same guy who wrecked the pound by betting against it in 1992.
The article also quoted our own research and then said "But not everyone agrees with Dennehy and Soros". Being quoted alongside such esteemed company certainly made me titter. But that wasn’t the important point.
What followed was a procession of fund managers proclaiming that the US market wasn’t over-valued. One said "the economy is fairly robust… Companies are doing a good job" – a robust defence? Another said "company debt levels, inflation, and commodity costs are low". And that is important why?
Of course they would say it isn’t over-valued. (Would you ask a barber if you needed a haircut?)
The latter is noise and you must at all costs ignore it. The valuation of a market is a simple matter to establish and there are acres of research, from around the globe, over many decades, which illustrates that the returns from your investments depend on the valuation when you start investing – that is it.
Pretty much everything else is noise to be ignored – whether the economy is "robust", and the level of inflation, debt and commodities are all irrelevant if the market is already screamingly over-valued at the point you wish to invest.
Many investors think that making big macro economic calls is the secret to investment success. Counter-intuitively detailed research has shown that those economies with the highest GDP (i.e. “robust”) have delivered the lowest returns.
As one man said "The greatest obstacle to discovery is not ignorance – it is the illusion of knowledge". And therein lies a problem for most investors. Either they gather irrelevant information, or they gather a vast volume, confusing more information with being better informed.
One of the most notable psychologists of the last century, George Miller, found that the average human’s conscious memory can only handle seven bits of information.
Or as Sherlock Holmes put it "for every addition of knowledge, you forget something you knew before. It is of the highest importance, therefore, not to have useless facts elbowing out the useful ones."
Someone said of golf "Simplicity, concentration and economy of time and effort have been the distinguishing features of the great players, while others lost their way to glory by wandering in a maze of detail".
Replace "players" with "investors" and you have a great nugget of wisdom for investors.
To summarise, in the words of James Montier "too much time is spent trying to find out more and more about less and less, until we know everything about nothing. Rarely if ever do we stop and ask ourselves what we actually need to know!".
FURTHER READING