As we navigate through the tail end of 2021, the financial press is once again overflowing with predictions. It is human nature to crave certainty which can lead to us supporting predictions that best fit the information we have consumed. Predictions on interest rates, inflation, earnings growth, trajectory of COVID cases, election results…..you name it, there is no shortage of people willing to tell you what will happen.
When we dig into the success rate of predictions, we see how difficult it is to see into the future.
This study from Tomgren and Montgomery points out that as confidence of predictions increases, the accuracy of those predictions remains flat at best. On the left, although students were less confident in their stock selection, they were accurate 50% of the time. Professionals were more confident due to their perceived ability to access and analyze information in a better way however, that confidence led to success only 40% of the time. This is not just a phenomenon seen in stock selection. On the right, the study showed that horse racing bookies became more confident in their picks as they were given more information but that had little to no bearing on the accuracy of their predictions.
So, what does our crystal ball tell us? We predict that your savings habits will drive a well-funded retirement. We predict that proper diversification will lead to investment success more often than betting on one stock or idea. We predict that those who start early and leverage the power of compounding will build more wealth and we predict that those who build and withdraw capital in the most tax efficient way, will end up with more in their pockets to spend.
The Canadian Election
Our election has now come and gone and left us largely in the same position. As per our comments above, we can’t predict where this will lead us, but it does cause us to be more aware of potential tax changes and how this may affect your net worth over the coming years. At some point we’ll need to start paying back government debt so it would be reasonable to assume that taxes may increase. Will this be a hike in income tax rates, a change to the capital gains inclusion rate or perhaps a change to the tax-free status of growth in our principal residences? We will continue to keep a close eye on potential changes.
Current Market Conditions
In general, we see economies around the world in the mid portion of the business cycle. Economic growth continues to spring forward from the depths of the pandemic lows. Earnings growth continues to rebound, posting increases that we have rarely seen before. Although these metrics are bound to slow down from here, this is usually a time where it pays to remain invested. Our focus on quality companies with the ability to pass price increases on to their clients, companies with above average growth potential and not overpaying for these companies should continue to serve us well.
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty