Predictions and antifragility

Not to pick on GBH Insights during the holiday season, but making a prediction on June 19, 2018 that Netflix was going to rise from $400 to $500 didn't work out (1). It wasn't that the arrow missed the target - it flew over the back of the range. At the time of the prediction, Netflix was hitting its all-time high, and today trades for - wait for it - $300.

Maybe the analysts forgot to factor in a small operation called the Walt Disney Company. Maybe they didn't check the cash flows, or maybe their international subscriber projections were off. Maybe a price to earnings ratio over 100 didn't phase them. But that's not really the point - individual firms are wrong often. Stock-picking has proved to be futile on an extended scale; read more about that here.

Hendrick Bessembinder's November 2017 study found that the best performing 4% of companies explain the net gain for the entire U.S. stock market since 1926 (2). But it's harder than just picking the correct 4%, because you would have had to own them at the correct time. If you traded in and out of Apple in the 1990's, for example, you would not benefit from the run in shares that occurred when the iPhone launched. Regardless, we're not looking for 4% bets at One Day In July.

Oh, and by the way, it's a lot worse if you include the effects of capital gains taxes.

What about other markets? Let's swing over to that paragon of finance, Goldman Sachs. In late January this year, their analysts were predicting the Fed would raise interest rates four times in 2019 (3). Instead it cut interest rates three times. The best thing that could be said for them this year is that if you used absolute values, they were only off by 33%.

It doesn't matter if you are GBH or Goldman, you aren't going to predict the future in any way that is not explainable by randomness or luck. The danger as an investor is believing you can.

I am reading Antifragile, by Nassim Taleb, author of The Black Swan. Reading Taleb is like going on a whale watch - when he surfaces, the insights are incredible. But much of the time he's under water. You know something is going on in his head, it's just hard to understand what.

Something that is antifragile benefits from disorder. It doesn't merely resist damage, but benefits. The long Treasury positions in client portfolios are antifragile - when the world gets messy, they tend to rise. The problem I have with corporate, high-yield, and even many state bonds is they are not antifragile. They are merely resilient. That is not good enough for the safety positions of an investment program. Hopefully many of you who are clients saw how this played out in your own portfolios in 2019.

Dan Cunningham

(1) CNBC Netflix gets a $500 price target
(2) Bessembinder, Do Stocks Outperform Treasury Bills
(3) CNBC Nov 19, 2019

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