The Investor’s Superpower: Admitting “I Don’t Know”

Let's start with interest rates.

The head of the Federal Reserve is one of the most powerful economic figures in the world.

The Federal Reserve employs economists, statisticians, researchers and analysts.

It has access to enormous quantities of economic data.

And yet, can the head of the Federal Reserve tell you with certainty what interest rates will be in two years' time? I think we can safely say, no, they cannot.

They can provide forecasts.

They can explain their expectations.

They can offer guidance.

But a forecast is not knowledge.

If people with access to all those resources cannot know exactly where interest rates will be several years from now, why should the average investor believe that they can? And yet many investors make major investment decisions based on precisely that sort of prediction.

They forecast interest rates.

They forecast inflation.

They forecast economic growth.

And then they buy or sell investments based on the assumption that all three forecasts will be correct.

That is rather a fragile foundation on which to build a portfolio.

The same applies to the economy.

I cannot remember many economists predicting the last major recession with any great confidence before it happened.

Afterwards, of course, there was no shortage of explanations.

Once something has happened, it often becomes remarkably easy to explain.

Before it happens, it's a different matter entirely.

The economy is made up of millions of businesses and billions of people, all making decisions that influence one another.

Add to the mix governments, central banks, technological developments, wars, natural disasters and unexpected events.

And the idea that somebody can confidently predict exactly what the economy will do over the next five years begins to look rather ambitious.

And yet investors think that they can confidently predict the behaviour of the entire global economy.

Oil prices provide another example.