Foolish FTSE Predictions

Zenda

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By Cliff D'Arcy

One of my favourite quotes from the financial world - often used to describe the behaviour of economists, stock-market pundits and so on - is:

"Forecasting is like trying to drive a car blindfolded, following directions given by a person looking out of the back window."

It seems particularly apt at this time of year, when analysts at the big investment banks and brokers present their predictions for the year-end level of the FTSE 100 (^FTSE - news) in twelve months' time.

Here are six of the latest offerings, ranked from least to most optimistic:

Company FTSE prediction Percentage rise*

Morgan Stanley 4,500 - 1.2%

HSBC 4,700 - 5.7%
Goldman Sachs 4,800 - 8.0%

Lehman Brothers 4,900 - 10.2%

Deutsche Bank 5,000 - 12.5%

UBS 5,000 - 12.5%

* from Friday's close of 4,444.7

Note that all of these companies are predicting that the Footsie will rise next year, but that stands to reason. After all, they're all in the business of making money from equity investment, so it's inevitable that they're going to talk up the market every year, because it's in their interest to do so!

However, I take all these predictions with a hefty pinch of salt, for these reasons:

Over a twenty-year period, eight of ten managers of active funds fail to beat the FTSE All-Share index. If they can't even beat this major benchmark over the long term, why would you trust their predictions over a single year?

The Financial Services Authority came up with the following wealth warning for investors: "past performance is not a guide to the future". This seems particularly true when applied to the stock market as a whole: one year's performance bears little resemblance to returns in previous or future years.

These predictions tend to be very closely clustered. In other words, analysts are terrified of going out on a limb by publishing figures that are meaningfully different from those released by their peers. After all, any resulting bad publicity could hit their employer's credibility and business performance.
I see a lot of coverage in the business pages about these predictions, but precious little comment on how these commentators performed over the previous year. A friend of mine produced one of the above figures - and I can tell you that his past record isn't that impressive (but he's still mightily well paid)!
These analysts are undoubtedly brainier than I am, but they are unwilling - perhaps even unable - to admit the truth: they haven't a clue what will happen to the market at any point in the future: tomorrow, next week, next month or next year. They don't even know if the market will go up or down over any given period.
Long-term investors shouldn't give a hoot about where the Footsie will be in twelve months' time. What matters to us is the continuation of the market's historical growth trend. Despite the recent three-year bear market, that record is still very much intact: with dividends reinvested, the UK stock market grew by almost 12.5% a year on average between 1972 and 2002
 
Over a twenty-year period, eight of ten managers of active funds fail to beat the FTSE All-Share index.

Every time I read this it sobers me and is the reason why the core of my equity portfolio is in passive tracking funds (chosen by the criteria of cost and tracking error).
 
The reason that most fund managers fail to beat the market is that they ARE the market.

They can't load up on a stock they like quickly, and they are even more incapable of dumping a share they want "out of" without moving the price against them. They are unable to buy enough of a small cap company to significantly affect the performance of the fund, even if it shoots up, and the effect is not sufficient to make the time invested in research worthwhile. Also they have to spread their selection across the all-share index rather than in their favourite 10 - 12 shares, and being out of the market is not an option. As private investors/traders we can buy/sell at will without moving the market - buying a full position or exiting a full position with a single trade - and if we don't like what we see we can stand aside. We can trade small cap stocks and it will have a meaningful effect on our portfolio. We can get in and out of hot sectors at the click of a mouse, and go both long and short.

It was when this dawned on me that I realised that I should be able to beat a fund manager every time and I first started trading/investing.
 
Roger,
great post........can we send our pension contributions to you instead...

cheers
 
Thanks for the plaudits guys - but this isn't rocket science. To take it a step further I could go on to use the "F" word - fundamentals! How would a passive FTSE 100 fund behave if you could weed out those stocks which :-

1. are not growing earnings,
2. have horrendously high debt
3. have underperformed the market as a whole over the last month and year.
4. are in a poorly performing sector?

I say "could" but I won't because I'll be on the receiving end of a "broadside " from Mr Charts! :) :D
 
Funny you should say that, Roger.......but when did you and I last disagree about anything? ;-)
So, to break an established multi-year tradition I "could" have some reservations about number 4 on your list ;-)
Sector rotation often means buying into those sectors which have been weak in the immediate past ;-)
But you know that!
Which leads me, Roger, to ask if you've seen Larry Connors' recent work? If not I'll send it to you.
HNY
Richard
 
I like this topic, and believe it contains within a great deal more than meets the eye!
Surely the global investment industry has to be one of the worlds largest. If we accept that it is, why is it allowed to constantly get away with unacceptable performance with only it's own previous track record as a precedent! Why does the general public believe what they tell it? Why don't we think for ourselves? Why are they not rewarded on performance?
The public believe what they want to believe! Most of us are followers! And I hope in the future reward will be governed by performance.(if any of the much wanted and heralded "industry reformations" are introduced.)

What I mean about the depth of this subject is this...

I was also going to post on "Follow My Trade", now I do not need to because it is the same issue at the heart of the matter. The majority of us are sheep, we want someone else to blame, and are not prepared to take risk. Perhaps this herd mentality is why 90% of traders fail - failure to take up and accept personal responsibility!
I am absolutely staggered at the level of attention and seeming adulation that the "follow my trade"/Index King type of postings are able to generate. Having said that, I shouldn't be, if we consider how many Trillions of dollars/pounds/yen/whatever that we as the general public have been trusting to others to "invest" on our behalves!

I do feel better for that!
Cheers
Quercus
 
The one type of investment where managers are paid on performance,the public are not allowed to invest in because they are not "sophisticated or rich enough". I refer of course to hedge funds,where if you don't make money for your investors,you earn sweet FA...
Seems to me the general public are shafted whichever way they turn.....

cheers
 
Excellent!

...Around the 1700's during the agricultural revolution a course of crop rotation. Jethro Tull (no joke) experimented with and found this to be very productive.

In essence slow, medium and fast growing crops were cultivated during the year with a fourth crop of clover and used for animal grazing. When the this field had rested in the cycle is was packed with nutrients and ready to explode and always produces excellent crops. The secret to this method was the management of the land.

This ensured the most efficient use of crop fields whilst also being given the time to rest and replenish itself ensuring future growth.

I could say, and as Roger suggested, that this method is precisely how we view the management of our portfolio.

Sifting the weat from the chaff is an age old formula and shouldn't be forgotten so easily

moving swiftly on...
I also have to wholeheartedly agree with quercus, why do people believe what they are told without investigating for themselves or even forming their own opinions?
People only believe what they want to believe even when they are told with categoric proof.

If DW or VS told us that if you put your hand in the fire you will become a successful trader, I wonder how many folks would see if it works.

Happy Trading
Newtron Bomb

(feeling rather reflective ;) )

Proof that you cant think for yourself
Think of a colour NOW..............................................it was red, then you thought of blue!
 
On a more serious note i do think that fund mangers should only be paid on performance.

This will be more in the best interest of the client and the professionalism of the industry.


NB
 
Another problem is that the performance of many managed funds is routinely compared with comparable indices. The fear of underperforming the index and thus losing business forces active fund managers to become closet trackers.

So if you're after buying anything but the most specialist funds you might as well let a cheap computer rather than an expensive human fund manager track the index for you.

The eroding effect of management charges over time can be huge and tracker charges are usually a quarter or even less than managed funds. The fact that the big money-purchase pension funds in which a lot of the ordinary folks in this country have their retirement savings invested routinely offer high-charge "lifestyle" and other actively-managed funds as default whilst rarely offering the option of cheap tracker funds is in my opinion one of the biggest swindles of the investment industry.

It's conning the very people who pooled investments are supposed to protect - the sure-fire wealth erosion by unnecessarily high fixed charges rather than stock market risk (which at least has a chance of working in their favour)
 
Last edited:
2468steve said:
The one type of investment where managers are paid on performance,the public are not allowed to invest in because they are not "sophisticated or rich enough". I refer of course to hedge funds,where if you don't make money for your investors,you earn sweet FA...
Seems to me the general public are shafted whichever way they turn.....

cheers

Too right!

There are a few fund-of-funds investment trusts quoted on the LSE that give the mortal exposure to hedge funds. Sadly you have to pay a charge to two sets of managers this way, and the fund-of-funds manager usually takes a fixed charge as well as a perfomance-based charge, however this is the only way that lower net worth people (read non-millionaires) can invest in hedge funds unless you can find a lot of trusted like-minded folks to pool your investment :(

I manage my pension arrangements through a SIPP and one of my rules is to keep a sensible percentage of the fund - currently 30% - in hedge funds through these vehicles, as they have a very low correlation to equity returns and have higher returns with less risk than bonds.

However it would be much easier if we could just trade properly in our retirement funds - after all in essence short-term trading is all that many of the hedge fund managers are doing!
 
By Cliff D'Arcy

One of my favourite quotes from the financial world - often used to describe the behaviour of economists, stock-market pundits and so on - is:

"Forecasting is like trying to drive a car blindfolded, following directions given by a person looking out of the back window."

It seems particularly apt at this time of year, when analysts at the big investment banks and brokers present their predictions for the year-end level of the FTSE 100 (^FTSE - news) in twelve months' time.

Here are six of the latest offerings, ranked from least to most optimistic:

Company FTSE prediction Percentage rise*

Morgan Stanley 4,500 - 1.2%

HSBC 4,700 - 5.7%
Goldman Sachs 4,800 - 8.0%

Lehman Brothers 4,900 - 10.2%

Deutsche Bank 5,000 - 12.5%

UBS 5,000 - 12.5%

* from Friday's close of 4,444.7
Posted by Zenda the end of last year.What are the predictions now?
Will we ever see 5000, and we are told we are so prosperous.
 
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