The Good News is Nobody Knows Anything!

As one of Hollywood’s most successful screenwriters, William Goldman won two Academy Awards and had over twenty of his screenplays made into movies. You’ve probably seen one (or more) of his most notable produced screenplays, such as Butch Cassidy and the Sundance Kid, All the President’s Men, The Princess Bride, Maverick, Misery, and The Ghost and the Darkness. Goldman was also paid handsomely for doing uncredited rewrites on numerous other well-known films.

However, arguably his most famous line isn’t from one of his movies. It was from a book he wrote on the movie business called Adventures in the Screen Trade, and it’s an assessment of the business itself.

“Nobody knows anything”

Goldman suggested that despite all the money spent on big name actors, screenwriters, and skilled directors, no one, including the studios doing the financing, had any idea which movies would be a hit or a miss. From greenlight, throughout the making of the picture, to the test screenings, to the trailers and finally the marketing, everyone was in the dark no matter how they felt about the movie’s prospects.

No one had any idea on whether a movie would resonate with audiences, evidence being almost every Hollywood studio passed on Raiders of the Lost Ark and Star Wars. Both went on to become phenomenal hits. From Goldman’s “Adventures in the Screen Trade:

Now, if the best people around don’t know at sneaks, and they don’t know during shooting, you better believe that executives don’t know when they’re trying to give a thumbs-up or – down; they’re trying to predict public taste three years ahead and it’s just not possible.

David Picker, a fine studio executive for many years, once said something to this effect: “If I had said yes to all the projects I turned down, and no to all the ones I took, it would have worked out about the same”.

And finally:

One additional anguish executives must cope with is that hot streaks don’t last.

Sooner or later, the reality that “nobody knows anything” is one investors are also required to understand. This can be hard to accept. Firstly, because it’s our hard-earned money on the line. Secondly, we’re conditioned to believe otherwise because the investment media is structured around discussing what comes next.

For all the predictions about the next recession, boom, hot company, hot sector, or hot asset class, the reality is nobody knows anything, at least in the short term. Trying to predict what will happen in the next month, quarter, or year, is a fool’s errand. And investors can’t look at the past to determine where they should put their money next because hot streaks don’t last.

All the information and data currently available is used by investors to determine the current price for assets. The future prices of those assets will be shaped by things we can’t see. New data and information will be released. Random and unpredictable events will occur. All this will be priced in, shaping future performance. No one can see the future, so nobody knows anything.

The best illustration of this remains a randomness of returns table. Bring up any time period, using the major asset classes, and it will always show a jumble of colours (representing their performance) that offer very few insights. The past twelve years highlights this randomness. In hindsight, global shares were the clear star performer, but for much of the time period investors were lectured and warned about risks to the global economy and the dire implications for global sharemarkets.

Global shares didn’t listen to those forecasts, but even with a decade plus of outperformance, global shares weren’t the best performer every year. Sometimes they were mid pack and there were a couple of negative years in there.

Shorten the timeframe by picking any year from the same table (2015 for example) and the twelve months of a year are equally as random.

If investors are looking for knowns, historically they’ve only arrived over the long term. Academia has identified a small number of knowns when it comes to performance. Shares have tended to outperform bonds, and the shares of both small-cap companies and companies with high book-to-market ratios (value companies) have performed better than the shares of larger and more established companies. That’s about it.

There’s one other certainty: cash. Cash itself provides certainty of short-term spending because it’s not volatile. Cash returns being higher than they’ve been in many years, combined with a climate of tougher economic times, may prompt a “dump it all in cash” reaction, but it’s worth remembering what a portfolio is: a structure.

A portfolio is constructed on what we know about how asset classes perform in the short term and the long term. Cash and fixed interest are less volatile and have lower expected returns over the long term. Shares and listed real estate are more volatile and have higher expected returns over the long term. Every portfolio is a balance of these knowns. It will be constructed and managed with the investor’s short-term needs and long-term goals in mind.

Whatever your plan is, your portfolio’s structure will reflect that. There’s no need to chase whatever looks most appealing or certain in the short term. Most portfolios are designed for the long term and have years of work to do, in either continuing to grow or providing for years of retirement. That means accepting nobody knows anything, at least in the short term.

If you have any questions or would like to discuss your portfolio with one of our team, or have a friend or family manner that might want to look at their options just shoot us an email here.