This is why we don’t try to or look to a market forecast, because it’s a beast of inevitable change. In this blog, we’re going to be digging into the acclaimed market foresight of RBS and why they got it wrong.
On the 12th of January at 10:42AM (GMT), The Guardian reported that the Royal Bank of Scotland encouraged investors to “sell everything ahead of [the] stock market crash” and advised “clients to shift to bonds”. This is exactly why STRIDE doesn’t try to forecast the market (and why we don’t listen to banks). In just a quick glance, the UK FTSE is 15.5% up, Dow Jones is 12.2% up, Euro STOXX is 1.96% up, and bond rates have plummeted. RBS, you were horribly wrong.
Where and Why RBS Went Horribly Wrong
Before we get into the meat of this blog, let’s quickly look back at last week’s interview with STRIDE’s CEO, Scott Nursten. We asked him what his take on the future of the UK market was, and this was his response:
“I don’t like to talk about the market as a whole. No one can accurately predict the market. But, are the individual components of an index fundamentally over or undervalued? That’s the question! There are still several businesses that are fundamentally undervalued. Find fabulous businesses, buy them cheap, hold them, and only sell them if Mr. Market has been completely irrational again, but on the exuberant side. The market may go up, but I’m not trying to forecast it.”
If you’d been one of RBS’s clients listening to their advice, with the plummeting bond rates and increasing market performance, you would have lost out on about a 20% gain already. This is what Nursten is talking of in the above quote; the unpredictability of the market makes trusting in any forecast absurd. An investor’s trust should be set aside for only their particular long-term strategy that’s been informed by fundamental analysis, valuation, and timing. The trust in your strategy should outweigh fear of market fluctuation, because your portfolio is built for high long-term returns.
So, why would have RBS recommend such a brash course of action for your investment portfolio? The answer really lies in the fact that their interests aren’t aligned with yours. When you sell shares and buy bonds, you have to pay bank fees for both trades (which only benefits the bank). The only angle that really motivates a bank or a financial advisor is them making money from you, but it’s not very dependent on you making money.
If RBS could create a spike of trades by forecasting the market would rise or fall, that’s great for them! It means they earn money, despite the accuracy of their forecast. It’s the investors auctioning the trades that lose out in the case of an inaccurate market forecast… which is what happened in this case.
What are Value Investors Meant to Listen to, then?
Now, that’s a good question! To answer it, let’s go back to another question asked by Nursten: ‘…are the individual components of an index fundamentally over or undervalued?’.
Did you know that Warren Buffett had only 1% of his current wealth when he was 50 years old? How is this relevant? Because, to answer our first question, value investors should be listening to the call of compound interest… and they’ll hear it by fundamentally analysing companies’ long-term investment potential, timing their entrance into it and then their exit out of it.
We won’t go into too much detail in this blog, as we’ve written extensively on the topic previously. But, STRIDE’s 3D VI strategy is made up of these 3 principles; fundamental analysis, valuation, and timing. The principles themselves are built on the value of long-term compounding interest… meaning that once you’ve analysed a company is a good value investment, you shouldn’t need to worry about market fluctuations (unless it’s completely irrational), and 10 years down the line you can exit to enjoy the wonderful provision of compound interest.
If you want to read more about the STRIDE approach to running a portfolio, download our Practical Guide to Value Investing below.