We understand that it’s fundamentally unknowable but, for some reason, we like to believe that someone can tell us what the future holds. Unfortunately, financial journalists, especially at this time of year, often pander to this desire.

Resourceful investing in 2011 was a typical (and to my mind, potentially misleading) example of the genotype. The article began by citing what “the institutions” foresee in 2011; “higher stock market prices driven by the big and small miners and the groups that supply those companies”.


It went on to say that “(b)y contrast there is no joy in banking, retailing and many other local areas of the economy, including the groups that supply the domestic building industry.”

It’s not clear whether the author is talking about the situation in the real economy, or the prospects for stocks in these sectors - a crucial distinction that’s easy to miss.
Spotting trends in the “real” economy is one thing, but directly translating those trends into projected stock market movements is quite another.
And that’s what the journalist seems to do in the next line; “If that’s the way things are going to be in 2011 then the obvious strategy is to raise the percentage of your portfolio held in miners and mining related stocks.”
This conclusion does not necessarily follow. The stockmarket is frequently referred to as a “discounting machine”. Investors look to the future and incorporate the trends they believe they can see ahead into today’s share prices.
The journalist's contention that increasing your exposure to mining and mining-related stocks is “the obvious strategy” can only be justified by saying that you expect these companies to perform even better than investors already expect. And they’re expecting rather a lot. Prices in the sector have been on the boil for more than six months.
The opposite applies to the banking, retailing and building-related stocks. The prices of stocks in these sectors have already been belted, incorporating lower future expectations into their prices.

The risk the author runs - and his readers may unwittingly be assuming - is conflating current business trends with future movements in share prices. These are not the same thing.
If investors have done their job properly (and sometimes they don’t), obvious trends should already be fully reflected in current prices. If so, then by increasing the percentage of mining stocks in your portfolio today, as recommended, you risk buying near the top.

Buying some miners and mining-related stocks now may make some sense (we have a handful on our current buy list at The Intelligent Investor) but not for the reasons put forward in the article. As author and fund manager Michael Lewitt says, “The sharemarket is not an economy, even though it plays one on TV”.

Missing out

What makes the advice implied in this article doubly dangerous is that, because the market has already gone up, more people may be susceptible to it; fearing that they’ll miss out on further moves.

The sharemarket can inspire odd behaviour in us. Where else do people get excited when the price of something they are thinking of buying is marked up?

For newer investors, this is a potentially expensive trap, which is why our team has prepared a New Year’s educational program starting on 1 February .

Instead of chasing prices up, losing money and swearing off the sharemarket altogether, I’d rather see investors do what we do in other areas of our lives; take advantage of lower prices (in the next downturn). Instead, inexperienced investors are often scared off by them.

Low prices are usually the result of uncertainty about the future, about things going wrong rather than right. That’s in stark contrast to the illusory clarity offered by forecasters and others interested in predicting the future.

Over the next few weeks, that’s what I'll be focusing on in this column; what might go wrong.

Because genuine stock opportunities are more common when things go awry than when we have what Warren Buffett calls a “cheery consensus”.

This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor.