The perils of insouciance

Jonathan Davis says investors’ disregard for risk has paid off handsomely in 2006 — but it may not in 2007

A good general rule for investors is to take no notice of consensus predictions about what is going to happen in the next 12 months. The track record of year-end investment punditry is consistently poor. That makes the Christmas and New Year period particularly hazardous for the unwary investor, as the demand for forecasts is at its peak, and the capacity for misdirection consequently also high.

This is especially so for those who are not aware of J.K. Galbraith’s adage that economists forecast ‘not because they know, but because they are asked’. One professional investor of my acquaintance has turned forecasting folly into a source of insight. Ken Fisher, an investment manager from the West Coast of the United States, logs the market and interest-rate predictions of all the mainstream market forecasters in the US, who are legion.