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Equity markets have been characterised by increased volatility in the recent past. Associated with this is the short-term underperformance in the markets, which investors are nervous about especially with more uncertainty going forward. Figure 1 below illustrates how market underperformance and increased volatility have historically been associated using the FTSE/JSE All Share Index returns data. Figure 1: Rolling 1 Year Return & Rolling 1 Year Standard Deviation of the FTSE/JSE All Share...  Full story

Seed Weekly - Qui legit, adtendite: Let the reader beware

This article is rather paradoxical in that I am writing of the need to be circumspect about accepting everything that you read as fact.

The following email that I received highlights the issue of perspective:

A biker is riding by the zoo in Washington, DC when he sees a little girl leaning into the lion's cage. Suddenly, the lion grabs her by the collar of her jacket and tries to pull her inside to slaughter her, under the eyes of her screaming parents.

He jumps off his bike, runs to the cage and hits the lion square on the nose with a powerful punch.

Whimpering from the pain the lion jumps back, letting go of the girl, and the biker brings the girl to her terrified parents, who thank him endlessly. A reporter has watched the whole event.

The reporter, addressing the biker says, 'Sir, this was the most gallant and bravest thing I've seen a man do in my whole life.'

The biker replies, 'Why, it was nothing, really. The lion was behind bars. I just saw this little kid in danger, and acted as I felt right.'

The reporter says, 'Well, I'll make sure this won't go unnoticed. I'm a journalist, you know, and tomorrow's paper will have this story on the front page. So, what do you do for a living?'

The biker replies "I'm a U.S. Marine, and a volunteer for the Republican party.”

The following morning the biker buys the paper and reads, on the front page:

“U.S. MARINE ASSAULTS AFRICAN IMMIGRANT AND STEALS HIS LUNCH”

We can see that the perspective, pet hates and prejudices of a writer are very important, these determine which facts are left in the story, which facts are left out and which facts are emphasised.

“Hindsight bias” is another problem a reader often faces. When writing an article, a writer has all the facts about what happened and why it happened in front of him. In his book “Fooled by Randomness”, Nassim Taleb says that “A more vicious effect of hindsight bias is that those who are very good at predicting the past will think of themselves as very good at predicting the future…”. Whilst looking at the past can help us understand why things happened, the future remains unpredictable so take all predictions with a pinch of salt.

The last problem that I often have with financial articles as a financial advisor, is that the writer is often expressing an opinion on a very limited set of facts and he does not have to sit with the consequences of “unbundling” a long term plan when he changes his mind a year or two down the line.

I am the first person to emphasise the importance of reading to broaden your horizons and acquire new knowledge, I do however think that it is important to add a proviso “Qui legit, adtendite: Let the reader beware”.

Think carefully about what you are reading, think about the writers perspective and why he is writing what he is, and lastly a good rule of thumb is if the writer is making predictions / forecasts about what is going to happen in future, you can probably ignore what he has to say.

Kind regards,

Barry Hugo

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Wed, 24 Aug 2016

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