Wednesday April 16, 2014

Consenheim: The world is full of predictions — and not all of them are right

A few years back, I was at a fundraiser and Trevor Linden was the guest speaker. He was very entertaining and after he had regaled us with stories from his days in the NHL, he announced he was going to give away a signed jersey.

Trevor had everyone in the room stand up and informed us he was going to flip a coin. We needed to pick either heads or tails in our head (everyone had to commit to being honest). If you got it right, you stayed standing, if not, you sat down. Odds are that 50 per cent would be eliminated every time he flipped the coin. Gradually, the number of people standing was reduced. This continued until only one lucky participant remained and was awarded the prize.

But was this person the best skilled coin toss caller in the room, or was the magic of probability at work — someone had to win?

If you think there was some skill in the predicting of the odds of heads or tails, you might be right, but if you think the outcome was due to this skill, you are missing the point.
Someone always wins.
The part that everyone misses in this example is that all the people who sat down failed to predict correctly.
I bring this to your attention as the investment world is rife with predictions. There are predictions on just about everything you can imagine and just about as many on things you probably cannot.

The world is full of a great many sources of information and loves to provide predictions.

Every talking head out there wants to grab your attention with some emotionally (greed or fear) moving statement.

As an investor, what you need to consistently remind yourself of is that when someone predicts something correctly, there are many others who did not.

Even when someone predicts correctly, a few times in a row, this is usually probability at work and not necessarily a sign of future abilities.

I have found that most skilled portfolio managers do not really try to predict anything. They live in a world of probable outcomes. They invest based on strict rules and exhaustive research. They buy what they know and they are always cautious.

That is how they grow value over time. There are no tricks or secrets, just plain old hard work.

I have seen many “predictors” promoting their views, usually starting for free, and have very rarely seen any of them right.

There is one particular “clairvoyant” who never ceases to amaze me. This
individual predicted the DOW to be at 41,000 by 2008 and is currently foretelling the DOW at 3,300.

It appears as though whatever is greater at the time — greed or fear — drives the direction of the prediction.

Les Consenheim is a senior wealth adviser with ScotiaMcLeod - Consenheim Wealth Management and can be reached at 250-372-8117 or ScotiaMcLeod is a member of the Canadian Investor Protection Fund. This article is for general information purposes only. The views of the author do not necessarily reflect those of ScotiaMcLeod. Individuals should seek professional advice prior to acting on any information referred to herein.

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