Prediction Risk And Management

Do we know what will happen in the future? And if we did know, would it change our investment behaviour?

- Simon Brown

A great tweet from Stuart Theobald of Intellidex reads: “Imagine you had a machine that told you the news a year’s time from now. Imagine you had that a year ago. You would have shorted the market, right?”

The implication is obvious; if we’d known about the pandemic before it arrived, we’d surely have shorted the market – fully confident that it would be lower for longer – yet, the sell-off was short, and markets recovered quickly.

Humans tend to fall into the trap of believing that if one thing happens, then the other linked event will most certainly follow. But this is not true. One would expect a pandemic to see markets very much lower for a lengthy period, at least until we had a vaccine. Yet, central bank stimulus and a surge in tech stocks have global markets at, or near, all-time highs.