"Making predictions has become a mania. Practically all economists are called upon for their future views - and many go out of their way to write articles and make speeches about what's ahead. You hear all manner of theories proposed and presented."
"But the significant fact for us to hold before us, is the more prominence predictions receive, the more inaccurate they are likely to be."
"I think I'm on safe ground in asserting that so long as predictions remain popular and are so numerous as they are today, and so long as they receive notoriety through repetition in the Press and on the Radio, contrary opinions will increase in importance as thinking aids."
"Have you noticed the tendency we all tend to have of asking "what's wrong?" when some economic or political question comes up for discussion. You can think of any number of examples. When arguing about the stockmarket situation brokers are asked over and over again what's wrong with the market? Have you ever heard of anyone enquiring what's right with the market?"
"Yet I'll venture to assert if you ask what's right about economic trends when you're thinking about them, you'll get an entirely fresh slant on things. Try it sometimes, make it a habit. It's a contrary habit much to be recommended."
These are the words of Humphrey Neill in his book "The Art of Contrary Thinking" and were written in 1951! In it he refers to the earlier work on contrarianism by Gustave le Bon a specialist in crowd psychology, a contrarian in other words, who recommended it as an aid to investors in the 19th century. He was a follower of Johann Wolfang von Goethe who in the 18th century wrote "Doubt grows with knowledge".
When you are prepared to challenge commonly held accepted wisdom you get interesting results. That's why we write about people slavishly accepting UK retail figures are bad, which were prominent headlines two or three weeks ago. Because it's in the news, you tend to assume it's accurate, but it's wise to challenge commonly held assumptions.
If UK retail figures do not include any internet sales then what use are they? I don't know whether they do or not but I can tell you US retail figures do not include any internet sales, nor do they include any sales by catalogue or, as they call it over there, direct to consumer.
Apple shipped 10.6 million iPods in the last three months and over 2 million Apple Macs (laptop computers to the uninitiated) and not one cent of Apple sales are included in US retail figures. No wonder we get a skewed idea about an economy. Incidentally the figures don't include any sales by Amazon or iTunes. You may have noticed iTunes is now the biggest retailer in the World, overtaking Walmart, and they don't even have any stores!
As you know we spend an enormous amount of time researching what's going on behind the scenes, not what's behind the headlines. When it's in the headlines it's too late. These days you can measure accurately what the crowd is thinking. There are various crowd sentiment indicators. Maybe I'm turning into a nerd, but I check them every day.
The crowd of private investors, and investment newsletter tipsters, triggered extreme pessimistic readings halfway through March. One set of indicators shows extremes of optimism and pessimism occurred 61 times between 1996 and 2006. Each time the crowds got it wrong. Surely a powerful contrary indicator. When it triggered extreme optimism, it was time to be nervous, and on extreme pessimism it was time to buy.
But it's not as easy as that surely? I have written countless times about how difficult it is to be contrarian. I recommended to various clients who had cash sitting on deposit in the middle of March it was a good time to buy. One couple who have been clients of mine for 25 years and, have done nicely over the years, after a recent meeting, wrote a nice little letter, which stated that as markets were in freefall, they would just sit tight, and wait until things improved.
One fund recommended has gone up 14% since. That's three years of net deposit interest they've missed. Humphrey Neill was right.
In 2008, taking the contrarian stance, is more valuable than before, because the size of the herd getting it wrong is greater. Personally I'd rather stick to the system used by successful fund managers like Graham French at M&G and Mike Williams now at the helm of Richmond Core. They look at trends, buy shares currently out of favour, but with firm prospects. I suggest we follow managers like them.
This letter is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.