Evidence Based Investing

The media frenzy is in full swing today as markets see sharp falls, especially in China (and today Hong Kong). But what will this all look like in 10 (or even 20) years? The chart below shows the FTSE All Share Index on a log basis. Without knowing when it occurred, it may be difficult to see the “crash”, when shares fell 21% in one day(!). This underscores the crucial importance of not over-reacting (or over-analysing) market movements. There is a distinction between the map and the terrain – volatility is the norm, not the exception, and those who can ignore the news, the hype, the scaremongering of the financial media will survive and prosper.

This is an example of a report I was asked to prepare for a client who was interested in the oil market. It was written on the 27th March 2015 when the oil price was less than $50 per barrel. Post this report, the oil price rose relentlessly, reaching $64 within a month. It clearly demonstrates the limits of using “fundamental analysis” to gauge future market movements. The fact that it was almost completely wrong, despite the wealth of data to support it, reminds one that trying to foretell markets’ behaviour is a fool’s errand. Markets are designed to wrong-foot the majority, and so it is much more sensible to just take what the market gives you. That is what Index Investing is all about. The Oil Market: How to Profit from Price Moves There are several ways to gain exposure to a rise in oil prices: Buy low cost oil producers Buy oil service companies…