KIM: Predictions often worthless, but take a look at these

January 7, 2012

Kim“Never make predictions, especially about the future,” legendary baseball manager Casey Stengel once said.

Indeed, predicting with any accuracy is certainly a daunting task. The practice rarely adds value to the investing process, so it’s often a waste of time making or reading others’ predictions. Still, there are some highly experienced and skilled investors who make unconventional predictions I think are worth paying attention to.

Investors have endured numerous periods of heightened market stress or even panic over the past few years. When these occur, many investors seek perceived safety in crowds. This was clearly demonstrated in 2011 as the correlation of returns between asset classes reached historically high levels. Instead of “wax on, wax off,” as in “The Karate Kid,” it was “risk on, risk off” for investors.

Investing with the herd might make you feel better, but it is definitely not the recipe for creating outstanding long-term performance. Thus, it’s important to challenge the consensus and think outside the box to consider other possible outcomes that would constitute market-moving surprises.

Byron Wien, vice chairman of Blackstone Advisory Partners, has issued lists of possible “surprises” for the upcoming year. Wien defines a “surprise” as an event the average investor would only assign a one-out-of-three chance of taking place, but that he believes is “probable,” having a better than 50-percent likelihood of happening.

His 27th annual list was published on Jan. 4. I’ll attempt to provide a thumbnail sketch of his “10 Surprises of 2012.”

1. The extraction of oil and gas from shale and rock begins to be a game changer. Oil drifts back to $85 a barrel and the United States becomes less dependent on Middle East supply.

2. Earnings for American corporations continue to move higher, driving the Standard & Poor’s 500 above 1,400 (up about 11 percent from 2011’s close.)

3. The U.S. economy gets its second wind. Real growth exceeds 3 percent and the unemployment rate drops below 8 percent. Recession fears fade and the drop in oil prices and rise in stock market improve consumer confidence.

4. The recovering economy and the declining unemployment rate help President Obama convince the voters that he didn’t do such a bad job in his first term after all. Democrats take back the House but lose the Senate in an anti-incumbent wave.

5. Europe finally develops a broad plan to deal with its sovereign debt problem and moves closer to fiscal cohesion.

6. The computer replaces conventional armaments as the principal weapon of terrorists and geopolitical adversaries.

7. Concerned over rapid money supply growth in the developed world, investors buy the currencies of countries that seem to be managing their economies sensibly.

8. Congress decides its dysfunctional ways are harmful to both parties and acts before the November election to deal with the failure of the Super Committee to develop a program to reduce the U.S. budget deficit by $1.2 trillion over 10 years. Both defense and Medicare are cut significantly.

9. The Arab Spring finally overcomes Bashar al-Assad and his family’s rule over Syria ends. The ripple effects include the weakening of Hamas and Hezbollah and the further isolation of Iran.

10. After two years of poor stock market performance, emerging markets finally have a good year.

Don’t waste time making predictions, especially about the future. However, it’s well worth your effort to consider what might surprise the crowd in the upcoming year.•


Kim is the chief operating officer and chief compliance officer for Kirr Marbach & Co. LLC, an investment adviser based in Columbus, Ind. He can be reached at (812) 376-9444 or mickey@kirrmar.com.


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