The investment world spends much time poring over data in an attempt to predict future investment returns.
But, as we know, the future is entirely unpredictable – there are no facts about it.
However human nature is quite persistent, how we react as group – “the madness of crowds” – is pretty dependable.
We swing from the depths of despair to wild optimism about all manner of things – always passing through a rational / ticking along phase.
At the extremes we predictably forget that the next move is more likely to be in the other direction. We forget that wild optimism comes just before a fall and that despair precedes the good times.
We don’t seem to learn from these lessons, how ever often they repeat themselves, our herd mentality is strong.
However, at the extremes is where outlandish returns can be made. If we zig while most are zagging we can avoid the damage that these extremes can wreak.
And so that’s what we aim to do at the extremities, and so far it’s worked.
But most of the time we are in some part of “normal” or “nothing unexpected” which is where we are now – not much out of the ordinary is happening. Wars, wonky governments, interest rates and inflation are all par for the course. Things could get a lot worse or a lot better – the fact that it could be either is a good indication that we are someway off over or under optimism.
And so, rather than try to guess what comes next, we will simply keep an eye on how the herd is behaving and be ready to move in a different direction is despondency or exuberance takes grip.