- Product Info
- Optional Extra
- Learn
- Shares 101
- Roadmap to Wealth
- How to Select my Shares
- Understanding Investing
- Understanding Markets
- Analysing a Company
- Managing my Portfolio
- Investing in Krugerrands
- Calculators
- Shares FAQ
- Krugerrands FAQ
- Share Swarm
Predicting Distaster - Quarter 3, June 2012
On 11 May 2000, The Economist magazine's cover story was, "The Hopeless Continent" which focussed on Afric's woes. The heading was fairly self-explanatory and given the respect that people accord the publication, it was damaging. In the event, the article was spectacularly wrong and Africa has proven to be the globe's fastest growing continent over the last decade. This just proves that no matter how respected the "expert", we need to treat all predictions with deep scepticism.
Experts are poor predictors
In a book called "Expert Political Judgement" the author, Philip Tetlock, shows how inaccurate political experts are at forecasting events. Ironically, the more well-known the expert, the more inaccurate the predictions! The same principle applies to investment and economic predictions. Various studies have been done in South Africa and around the world to see how accurate economists are at predicting the movement of their foreign exchange rates. More than 50% of economists cannot even predict the direction of their currency i.e. they predict that their currency will strengthen and then it actually weakens. This means that we should not rely on any predictions (otherwise known as forecasts) from experts, no matter how well respected or prominent they are. In truth, any investment planning that is based on predictions is likely to be wrong.
With all the problems in Europe and the USA - what is going to happen to SA?
We are all concerned about the massive problems that are crippling the European and American economies. They have problems that are not going to be resolved for years to come. The most basic solution to the problem is that Europeans need to spend less than they earn - both individuals and Governments alike. This means a change of behaviour which is very difficult for most human beings. If you are accustomed to living on R100,000 per month and suddenly have to live on R50,000 per month, it is almost impossible to do so without real emotional trauma. This is the scale of the problem facing Europe - particularly Greece, Spain, Portugal and Ireland.
South Africans are worried about how this will impact our country and our stock market in particular. The economic impact is already being felt and will continue to be felt for some time. However, we need to understand that there is no direct relationship ("correlation" is the jargon) between economic growth and stock market performance. There have been many instances where an economy struggles whilst the stock market flourishes. One of the reasons for optimism to counter the gloom is the growth we are seeing in Africa and other emerging markets.
Over the past decade, six of the world's fastest-growing countries were in Africa. Even if one allows for Europe's problems, the IMF still expects Africa to grow by 6% in 2012. Naturally, if you have read this whole article, you should give no credence to what the IMF predicts as they are also going to be wrong. In summary, there are many reasons to be concerned but stock markets are forward looking. They are irrational in the short term as they typically overreact to bad news but they become more rational over time. This means that our stock market has probably discounted much of the bad news in current prices and only new, unexpected problems will cause our market to decline on a sustained basis from these levels.
I am not sure who first said, "Everything will be okay in the end and if it is not okay, it is not the end." As an aside, on 3 December 2011 the Economist published an article called, The Hopeful Continent about Africa. It just goes to show that the wheel always turns!
Warren Ingram, CFP®, has been advising people about their money since 1996 and is a director of Galileo Capital, www.galileocapital.co.za.
Do you have any personal finance questions you would like to ask Warren? Email him at Warren@galileocapital.co.za