21 Apr 2010 | Opinion

In Search of the Truth 

Robert O’Riordan argues that investors should be wary of those who make definitive forecasts

The expectation that the person who looks after your money will have a clear view of the future is understandable; after all that is why they are being paid to look after your money.

Superficially, the question “where is the market going to?” looks reasonable. However, to dig a bit deeper, a better question might be: “where do you think the market is going to?” For the truth of the matter is nobody knows the answer, neither the most seasoned investor nor the most inspired commentator. At best, all any investor can do is to make an educated guess. This is possibly an uncomfortable truth for many. The more nervous may even be inclined to store their wealth under their mattresses once they find this out.

To take the question one step further, the wise steward might answer, “I don’t know where the market is going, but what I will do is try to seek out individual companies whose prospects I rate.”

However, even this is difficult, as at some stage the price of the shares and how they are valued in the market needs to be taken into account before investing.

One leading and very well respected US Fund Management Group currently establishing a beachhead in the UK states in its marketing literature that certain categories of investors should not consider holding a particular investment. This honest approach seems sensible and could weed out at an early stage the over nervous or those ill suited to a particular fund or investment. However, honest or even reverse marketing is not always popular with those hard selling corporations with sales targets to meet. Caveat emptor indeed.

The man on the Clapham omnibus, or lady on the Lothian Region Number 23 (known locally as the Morningside taxi), might be surprised and even alarmed to discover nobody really knows what is going to happen to markets in the future but they are better off knowing this as fact than being lulled into a false sense of security.

The papers often don’t help, as they are full of predictions often cast with an aura of false certainty. Predictions will come from those you think might know while the certainty of tone can go one step further, suggesting these are not forecasts but an actual glimpse into the future. The papers are replete with earnings forecasts for individual companies. Sometimes, the figure quoted will be to one or two decimal places, thus lending a further note of false certainty to what is, at best, an educated guess.

To use the word ‘guess’ in a headline might be true, but unfortunately it does not sell papers nor make news.

A former Lord Chancellor (and man of parts: philosopher, scientist and lawyer), Francis Bacon put it neatly when he said, “If a man will begin with certainties, he shall end in doubts; but if he will be content to begin with doubts, he shall end in certainties” (The Advancement of Learning 1605).

A Chinese version runs “To be uncertain is to be uncomfortable, but to be certain is to be ridiculous.”

Robert O’Riordan is responsible for liaising with investment trust boards at Baillie Gifford and for communications with shareholders.