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Money and Happiness | François Trahan and the economic apocalypse



In the newsletter money and happiness, sent by email on Tuesday, our journalist Nicolas Bérubé offers reflections on enrichment, the psychology of investors, financial decision-making. His texts are repeated here on Sundays.

The stock market is about to tip over. The US economic slowdown is likely to be serious, and a financial crisis is possible. Investors have a month or two to protect themselves.

This forecast by renowned stock market strategist and economist François Trahan is worthy of attention. When it was pronounced, in front of an audience of 120 financial analysts gathered in Quebec on September 28, 2016, people were astonished.

“Don’t shoot the messenger,” Mr. Trahan said, according to what journalist Louis Tanguay wrote at the time in Finance and Investment.

If you had been in this room, would you have been affected by these words?

Would you have sold your investments long enough to “let the storm pass”?

If so, you would have probably lost money. The markets continued their ascent. The growth of the US economy continued. A year after that prediction, the S&P 500 was up 19%, including dividends. $10,000 invested in an exchange-traded fund (ETF) tracking the S&P 500 on the day of that prediction is worth more than $20,000 today, just over six years later, for an average annual growth of almost 12%.

Mr. Trahan was talked about recently during his appearance on the set of Gérald Fillion, where he predicted an economic “apocalypse” this year, due to the effects of rapidly rising interest rates.

I don’t know if he’ll be right or wrong – although I’m sure sooner or later there will be crashes. My goal is not to obsess over François Trahan, who is only doing his job, and who does it well since he has won numerous prizes in his 25-year career on Wall Street.

I mention this to warn you: it is not because the great strategists of New York, Toronto or Montreal are making predictions that we should listen to them. Historically, by far the most successful approach has been to simply ignore them.

It should be understood that these strategists do not speak to the average investor. Their audience is institutional investors and portfolio managers who must be held accountable in the short term, and for whom every blip in the market matters.

Also, it’s crazy how wrong strategists are. Not just a little. Enormously. At the start of each year, economists from major Wall Street investment firms give their predictions as to the value of the S&P 500 at the end of the year. Here is what it gave for the year 2022:

And the year 2022 has not been exceptional when it comes to bad predictions. Every year it’s a comedy of errors. The reality surprises economists.

It is that the economy is not led by columns of figures. It is driven by the decisions of billions of human beings. And humans are hard to decipher.

Quite frankly, I don’t pay attention to what the economists say. Think about it. You have all these 160 IQ economists who spend their lives studying the market. Can you name me an ultra-rich economist who made his fortune on the stock market? No.

Warren Buffett, famous investor

Buffett cites the example of John Maynard Keynes, one of the greatest economic theorists in history and father of macroeconomics, the study of major economic trends such as consumption, inflation, gross domestic product (GDP ) and unemployment, in particular.

Determined to use his knowledge to enrich himself, Keynes invested in the stock market and in currencies in the 1920s and 1930s. He lost a lot of money, before changing his method and investing for the long term, with more success.

“If you look at the whole history of [économistes], they don’t make a lot of money buying and selling stocks, but the people who buy and sell stocks listen to them. I have a little trouble with that,” Buffett says.

Note that journalists are no better than economists when it comes to predicting the future.

Financial author Morgan Housel noted that the words “pandemic” and “virus” were nowhere to be found in the annual forecast that the magazine The Economist published in January 2020. Nor do the words “Russia” and “Ukraine” appear in the forecasts for the year 2022 of the same magazine.

“It was impossible to foresee these two events,” writes Housel. But that’s the problem: the biggest news, the biggest risks, the most consequential events are always the ones you don’t see coming. »

I would add that the events we see coming, the ones that scare the most, often don’t take the form we expected.

For 10 years, we have lived through the debt crisis in Europe, the US federal government shutdown, Trump, the US-China trade war, Brexit, coronavirus, record unemployment rates, the return fromDouble occupation

An investor who would have invested $10,000 per year during this period in an ETF portfolio composed of 70% Canadian, American and international equities and 30% bonds would now find themselves with more than $152,000, for an average annual growth of more than 7%. And that includes one of the worst decades in history for bond yields.

Morgan Housel has a good phrase to describe his approach to money: “Save like a pessimist, invest like an optimist. »

It’s simple, but it’s not easy.

Especially when you stare the apocalypse in your eyes.

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