Stop Focusing on the Noise –  The Knowable vs The Unknowable

Stop Focusing on the Noise – The Knowable vs The Unknowable

March 18, 2022

“The function of economic forecasting is to make astrology look respectable.”

-John Kenneth Galbraith,  Economist and Author

Focus.  We’ve all been told this at some point in our lives, but how does it relate to long-term investor success?  How can this one word potentially provide a lifetime of retirement bliss (as you define it) or a possible lifetime of headaches and stress?  What I will describe is focusing on the Unknowable vs. Knowable - a key to long-term investor success.

Recently, you can’t turn on/listen to the radio, cable, or internet without the following commentary from a self-proclaimed “Expert” regarding: The Market’s Direction, Interest Rates, Economy, Oil Prices, and World Crisis.  All these areas are important - but in the short run Unknowable.  And this is where the focus begins to fade.

For example, the *table below provides the results from December of 1982 through 2021 of the average six month forecasted direction of interest rates from economists vs. the actual direction.  As you can clearly see, it has been a challenge for economists to predict what will happen in the short run.  Important but Unknowable. 

You may say to yourself, OK - but maybe those are the economists that received “C’s and D’s” in college, my person is much better.  Fair enough, let’s look at one of the most intelligent to see what he has said in the past - former Federal Reserve Chairman Allan Greenspan.

“It is rare that you can be as unqualifiedly bullish as you can now.” -January 7th, 1973

(Dow peaked four days later and then declined around 45%)

“…there are few signs to date of slowing in the pace of innovation and the spread of our newer technologies…”

-February 23, 2000 (NASDAQ peaked 16 days later)

“I was telling my colleagues the other day…I’d been dealing with these big mathematical models for forecasting the economy, and I’m looking at what’s going on the last few weeks, and I say - Y’know, if I could figure out a way to determine whether or not people are more fearful or changing to euphoric…I don’t need any of this other stuff.  I could forecast the economy better than any way I know.  The trouble is, we can’t figure that out.  I’ve been in the forecasting business for 50 years, and I’m no better than I ever was, and nobody else is either.”

-September 18th, 2007

If you are thinking, this is an area that can be extremely difficult to forecast.  Agreed - and I respect any economist who attempts to make sense of all the data they must interpret and then formulate an opinion.  Because the second they do…all the data changes, again. 

How about the direction of the markets? How have Wall Street Strategists fared in their short-term direction?  The *chart below reveals the Strategist Average Forecasted Market Change vs. Actual Market Change from 1999 through 2019.  Not only have the interest rate directions given prognosticators problems but trying to predict to market directions has been just as challenging.  Again, Important but Unknowable.

My point is simple; the average investor - which should cover just about everyone - should shift from looking at current issues that are important but Unknowable to Knowable for the long run.  What do we know in the long run?

  1. The average couple (non-smoking) who retires at age 62 will have at least one of them live another three-decades in retirement - based on advancing health technology and life expectancy.
  2. The same couple will likely need to provide an income they can’t outlive – over said three decades – to keep up with the rising cost of living.
  3. Since 1980 – the market (as shown in the chart below) has temporarily pulled back from its peak annually about 14%*.

    4. Since the end of WWII – the average bear market (below) has temporarily pulled the market back about 30% and lasts about 14 months*.

These are the Knowable facts – as history has shown.  Solution: A date specific and dollar specific financial plan.  When the brain (and human nature) turns to a comprehensive plan, the focus returns and a successful retirement can follow.


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* Six Month Average Forecasted Direction vs. Actual Direction- Legg Mason and The Wall Street Journal Survey of Economist. Provided by Davis Advisors

* Strategist Average Forecasted Market Change vs. Actual Market Change- Barron’s. Provided by Davis Advisors

*JP Morgan – Guild to the Markets February 2022

*Nick Murray – Bear Markets History 2021