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Tuesday, 4 April 2017

JSE Returns Over The Next 30 Years

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The main tool of active fund managers and 
economists 
What will the returns of the JSE over the next 30 years be like? Now there's an interesting question, and one which I think most people will have a view on.

And even though no one knows he answer for sure, I decided to pose this question to the Twittersphere last week. To be honest, before I sent the poll out, I had a pretty good idea of what the outcome would be...


I was pretty certain that most people would be of the opinion that the JSE returns over the next 30 years would be lower than the returns over the previous 30 years. I had three reasons for thinking this:
  1. Media bias. I have seen a number of articles and blog posts recently saying that we should not expect great returns from the JSE (and in fact equities in general) going forward. So the seed has already been planted in a lot of people' minds, that future returns are going to be less bountiful than before. Also this whole Pravin debacle was just in time for my little experiment, and the media did their usual impeccable job of putting all the "catastrophic", "end of world", "South Africa is doomed" and "disaster" type headlines front and centre.
  2. Recency bias. This is the phenomenon whereby people more easily remember something that has happened recently compared to something which happened further back. And let's be honest - the recent returns of the JSE have been pretty kak. People have long forgotten the "glory days" of 2011, 2012 and 2013. So when JSE returns are mentioned, people more easily associate the 3 year "flatness" we have experienced since 2014 than the good returns experienced further back..
  3. Pessimism bias. People are generally pessimistic, I think it is built into the Human DNA - to always consider negative outcomes. One of the reasons that, as a species, we have been pretty successful (define success?) is because we are able to think of any negative outcomes and prepare accordingly. But sometimes this is a bad thing, and can also be to our detriment - especially if it is overdone (similarly, being overly optimistic can also be to your detriment). Personally, I think people are a little too pessimistic too often - I mean just take a look at any comment section of any local news article and your coffee cup will suddenly seem half empty. Not sure if it is worse in South Africa, but people do seem grim in our little corner of the world.

The Results

So based on the above, I was pretty convinced of what the outcome of my little poll would be. The actual result of the poll is below:

Now I guess in theory the outcome of a poll like this should follow a bell curve (Gaussian distribution) with the majority of people expecting the returns to be the same, and then less but equal amounts of people expecting better and worse returns. But the results were very negatively skewed - and in fact even more so than I initially thought!

What was also interesting, was that there were more people that thought the returns would be better than those that thought they would be the same. Seems there are still some people with positive outlooks. Viva the optimists!

Of course to make a 30 year prediction is very naive, and in fact no one in their right mind should even be attempting this - if you turn out to be right, you may think of yourself as very smart, but it will be more down to luck than any "intuition" you might have had. In fact making any prediction about the near future, never mind the 30 year future is pretty stupid bold and probably best left to the "science" of astrologists, psychics, active fund managers and macro economists (I found what Naval Ravikant had to say about macroeconomics during a recent podcast interview very interesting1)

What Is My Prediction?

And just as I say how stupid it is to make predictions, let me give you mine.

I think there is more chance that the returns of the next thirty years will be pretty much in line with the previous 30 years (how boring) than being significantly different. Just like the previous 30 years, in the upcoming 30 years there will be crises, bull markets and bear markets. There will be bubbles and crashes. There will be high interest rates and low interest rates. There will probably be wars and political turmoil. Nothing new. Par for the course.

The more things change the more they stay the same and all that...

**As a quick aside, I have been getting a couple of questions on what to do about South Africa's recent downgrade to junk status. This event falls very clearly into my "stuff that sucks but nothing I can do about it" line of thinking, and so I try not to stress about it too much. 

 So how do you invest while in junk status? The same way you invest while in investment grade status! 

 Remember, over the longer term, a well diversified portfolio will weather any storm. An event such as this is the exact reason why people diversify in the first place. In a few years this will all be forgotten...




Till next time, Stay Stealthy!
 - ~ - ~

1 "The further I get, the more I realize macroeconomics is a combination of voodoo complex systems and politics. You can find macroeconomists that take every side of every argument. I think that discipline, because it doesn’t make falsifiable predictions, which is the hallmark of science, it’s become corrupted. You never have the counterexample on the economy. Because there’s so much data, people kind of cherry-pick for whatever political narrative they’re trying to push. To the extent that people spend all their time watching the macroeconomy or the fed forecasts or which way the stocks are going to go the next year, is it going to be a good year or bad year, that’s all junk. It’s no better than astrology. In fact, it’s probably even worse because it’s less entertaining. It’s just more stress-inducing. I think of macroeconomics as a junk science."

You can find the full interview over here.