The Evidence-Based Investor

Tame your inner economist

Posted by Robin Powell on September 27, 2017

If I had my time again, I would probably study economics at university. It’s a fascinating subject and hugely relevant to our everyday lives.

But how useful is it for an investor to be an expert in it? In my experience, it’s of very little use whatsoever; indeed, it may even be a hindrance.

Here’s why. First of all, economic forecasts are notoriously hit-and-miss. You name it, whether it’s interest rates, the jobs market, house prices, demand for Bitcoin or Anglo-US trade relations, we’re surrounded by “experts” proffering opinions on what is likely to happen.

But, as any of those who actually both to keep tabs on such prognostications — as my fellow blogger Barry Ritholtz does for instance — the track record of these sooth-ayers is truly shocking. As JK Galbraith once said, “The only function of economic forecasting is to make astrology look respectable.

Secondly, even if we could accurately forecast the economic future, the chances of us using that information to give us an edge over millions of other traders investors all around the world are very slim indeed. That’s because, contrary to common perception, the economy and the stock market are two very different things. They are of course connected, but much less closely, and in a much more subtle way, than most of us imagine.

All known information, including the opinions of leading economists, is already incorporated in current prices; new information is, by its nature, unexpected and is absorbed by the markets and reflected in prices within seconds.

So what if you have a PhD in macro-economic forecasting? Do you really  know something that no one else does and that will help you to outperform? Do you honestly think your adviser does, or your favourite fund manager?

None other than John Maynard Keynes, who famously invested money on behalf of King’s College, Cambridge, gave up on using his economic expertise to try to time the market. Yes, even Keynes, arguably the greatest economist of all, failed to predict the Wall Street Crash in 1929 and the Depression that followed and to adjust the college investments accordingly.

I recently interviewed Peter Westaway, Chief Economist for Vanguard Asset Management in Europe, on this very subject. He, too, is a very sharp guy; so much so, in fact, that for many years he was a senior economic adviser to the Bank of England. But Peter admits that even he doesn’t have an edge in the markets.

Please watch and share this video — and, when it comes to investing, remember to tame your inner economist.

Peter Westaway, Chief Economist at Vanguard Asset Management in Europe, says expertise in economics is of limited practical use for ordinary investors
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Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector. Regis Media.

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