A Tomorrow More Certain Than Today?
Suppose I asked you what you would be doing in 5 minutes. Odds are, you would be able to answer that question with some high degree of certainty. After all, it will probably look a bit like what you are doing at the time you were asked. Now, let’s move the goalpost back a bit and imagine that I asked you what you would be doing five weeks from now. It would certainly be exponentially harder to pinpoint, but your calendar may give some clues as to how you will be engaged at that time. Now imagine you were asked to forecast your actions five months, five years, or even fifty years from now – damn near impossible, right? Of course, it is because, in our quotidian existence, the present is far more knowable than the distant future.
What complicates investing then, is that the exact reverse is true. We have no idea what will happen today, very little notion of what next week holds, a slight inkling as to potential one-year returns but could take a pretty solid stab at 30 years from now. Consider the long-term performance of stocks by holding periods:
Over short periods of time, returns are nearly unknowable. Stocks are up about 60 percent of the time and down about 40 percent of the time, but the highs and lows are both very dramatic. Over a period more reflective of a long-term investment horizon, however, the future becomes far more certain. Returns average just over 10 percent per year, with the worst case being around 6 percent and the best case being nearly 15 percent. Not so scary anymore, but it does require a fundamental rethinking of reality, something that seems not to be happening. As statistician extraordinaire Nate Silver says in The Signal and the Noise:
“In the 1950s, the average share of common stock in an American company was held for about six years before being traded – consistent with the idea that stocks are a long-term investment. By the 2000s, the velocity of trading had increased roughly twelvefold. Instead of being held for six years, the same share of stock was traded after just six months. The trend shows few signs of abating: stock market volumes have been doubling once every four or five years.”
Intuition tells us that “now” is more knowable than “tomorrow” but Wall Street Bizarro World (WSBW) says otherwise. As Silver points out, more access to data and the disintermediary effects of technology make our tendency toward short-termism even greater. But the growing impatience of the masses only serves to benefit the savvy investor. As Ben Carlson says in A Wealth of Common Sense, “Individuals have to understand that no matter what innovations we see in the financial industry, patience will always be the great equalizer in financial markets. There’s no way to arbitrage good behavior over a long-time horizon. In fact, one of the biggest advantages individuals have over the pros is the ability to be patient.”
The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.
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