The crystal ball is always murky for economic pundits

PUBLISHED : Tuesday, 07 February, 2012, 12:00am
UPDATED : Tuesday, 07 February, 2012, 12:00am


Market pundits get it wrong half the time, so why do investors keep listening?

SCMP headline, February 6

I have several immediate observations to make here. First, what do these pundits get so wrong? Their job is to get more business for their employers. If they get that business in return for pundit talk, then they get it wrong not half the time but right all of the time.

Second, are they only wrong half the time? If we mean forecasts, then I think most of them are wrong much more often. The market is always smarter than the individual. The best pundits, in fact, are the ones who always get it wrong and some of them are very consistent this way - such as our financial secretary. Find one of them, and you've found gold. Just do the opposite of what they tell you and the money will roll in.

Lastly, why do investors keep listening? First ask what an investor is. If we mean people who make and hold investments that give them a greater return than their cost of capital, then such people generally do not listen to pundits. The listeners are mostly speculators, dedicated devotees of that fickle goddess, Fortune, and they never make much distinction between advice and dice.

I was a minor pundit for a number of years, a sell-side Asian investment strategist for a European bank. It is my experience that anyone trying to sway investors with research must wear two hats. In the office, it's crunching numbers. In front of clients, it's theatre.

This is not to say that investment presentations are false. It is simply to admit that the future is as opaque to pundits as it is to their audiences, and both sides of a presentation would do well to remember it. never found professional fund managers hanging on my every word. What they wanted from me was a well-argued and well-supported view on whatever the investment question of the day might be. Someone else with a different view would be along the same afternoon. An investment decision would be made from sorting out and sifting all the different views.

But this is not what speculators want. They want to be told what the future holds, and to be told in precise terms what to buy, what to sell and how many days it will take them to quadruple their stakes.

The pundits needed for this are the investment world's equivalent of plastic surgeons - good-looking, smooth-talking and utterly confident. A dark suit is required, a 'propah' accent goes down well and glasses can be a great accoutrement if held correctly to emphasise crucial points. Otherwise, the substance is much the same. In fact there is only one set of skills that investment professionals can really offer their clients: the ability to find buyers or sellers of the required investment, transact the business at a decent market price, put together the required paperwork, lodge it in the right place and effect payment.

It is no mean set of skills. Try doing it yourself without any training or staff backup. But, equally, it is the sort of thing that tellers do in banks and they are paid only thousands of Hong Kong dollars a month, not hundreds of thousands.

To get into an income bracket in the hundreds of thousands, you need to convince people that you can make them lots of money because you have special insight into the future. Whether or not you possess this insight is secondary. What is important is that they believe you have it. And, in fact, you don't. Nobody does. You may be right here and there, you may have a string of lucky calls, but nobody consistently gets it right. The price of the investment has invariably gone to where it belongs before you get there. That's the way of an efficient market. Only good inside information will get you the future and then you take the risk that your future is jail.

But if it still mystifies you that professional investment advisers get it wrong so often, ask yourself just one obvious question: If they're so smart why aren't they rich? Why do they still have to make their money from me?

Too few people ever ask this question - and they pay the price.