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A list of Dan Richards’ previous articles appears at the end of this article.
Dreary economic forecasts will sap your clients’ enthusiasm for investing. One clear way to overcome this hurdle is to adopt a contrarian attitude toward interpreting news and analysis.
Many academics describe the stock market as a highly efficient discounting mechanism – in theory if not in practice, share prices should reflect everything we know about the future.
That’s why astute investors search out insights that aren’t reflected in stock prices. For this to work, though, you have to be prepared to differ from the pack and defy conventional thinking – once an idea enters the mainstream, it no longer gives you an edge.
For example, investors who were early in identifying the potential of the internet and positioned themselves in tech stocks in the mid-90s ended up doing well; the latecomers who jumped on board in 1999 or 2000 had their heads handed to them.
Which brings us to where we stand today.
Despite all the attention to the “green shoots” popping up around us, the global economy still faces formidable challenges. With downbeat forecasts for growth and demand, unemployment, corporate profits, commodity prices and budget deficits as well as looming inflation concerns, the runup in markets since March 9 may mean the good news for the next while is already reflected in stock prices.
That’s why a growing school of thought says we’re in for a “range bound market” for the next few years, moving up and down in a relatively narrow sideways band. Under this scenario, you will have to work much harder to make money for your clients.
Extend your horizon out three to five years, however and it’s a different story – I can make a strong case can that today’s stock prices don’t fully reflect important positive elements in today’s news.
The role of innovation
Even with cutbacks in corporate spending, we’re still seeing huge investments in research and development around the world. When the U.S. market seemed stalled in 1989, Sir John Templeton defied convention and made large returns for his investors by expressing optimistic views - in part, he said, because more scientists were working at that point in time than had lived and worked from the beginning of humankind until about 1900.
That’s even truer today. And it’s not just the number of researchers - with computing power and the instant dissemination of the latest discoveries via the internet, scientists are ever more productive in their pursuit to solve the most difficult and challenging problems.
The stock market only reflects what we know – and by its nature has difficulty accounting for the effect of innovation.
In 1980, for instance, conventional wisdom held that the growth of the computer industry, which had been a good business in the 1970s as mini-computers replaced mainframes, would slow going forward. Almost no one saw the personal computer revolution coming. And in 1990, mainstream thinking said that computers had been a great business in the 1980s but would slow going forward, as most companies had purchased all the computers they needed. No one saw the rise of the internet and the evolution of the computer as a universal home appliance.
More recently, Apple’s stock price has been a great performer – largely because nobody foresaw the iPod or the iPhone. In the next few years, there are going to be many cases like Apple, as companies cash in on investments in research and development.
