Reminder that economists are not prophets

Feel free to reach out to PSG Wealth adviser Dawie Klopper CFP ® directly.

Morgan Housel, author of the book Psychology of Money, says historians are not prophets, and I would like to add, neither are investment economists. The point is that investment economists cannot predict the future. They do look at the past and patterns that emerged and apply these trying to predict the future. It’s only human to attempt to do so. If US equities had been strong over the last 10 years, then it is only human to predict a continuation of that strong performance.

However, I think it is important to realise history is not necessarily going to repeat itself. A single event such as the 9/11 terrorist attacks instantly changed the immediate past. Nelson Mandela’s release from prison changed the South African history, unlocking new powers. A lot of uncertainty prevailed in the run-up to the first democratic election in South Africa: the economy was devastated by sanctions, Chris Hani was murdered in 1993, KwaZulu-Natal suffered a low-key war between the ANC and Inkatha, and some of us collected tinned food and gas canisters. Yet the JSE rose 37% in the three months to the end of December 1993 – in other words, four months prior to the election. Fear and uncertainty would have prompted many people to avoid equities, rather seeking refuge in cash or offshore assets.

Surprises, be they positive or negative, happen regularly. These are the so-called ‘black swan’ events. They come as surprises but happen frequently enough not to be considered surprises. The only problem is that they disrupt the straight line of the past, forcing you to change your investment perspective.

It would have been much easier if investing were a hard, predictable science. NASA can already predict that the 40-metre sized Asteroid 2023 FP5 moving at a speed of 50 796 km/h will pass the earth at a distance of 4.09 million kilometres. A CT scan of your tender knee will tell the doctor that the cartilage is wearing away and you are in for a knee replacement.

However, the investment environment is not an exact science. You cannot look at it in a rational way and expect the future to be the same as the past.

What if we did not have a Bill Gates or a Hitler? Both changed the world: Gates in a positive way and Hitler in a terribly negative way. These days, we have a Musk and a Putin changing the environment, one positively and one negatively. But these are only a few individuals out of over 7 billion people making a major impact on the future. The mere fact that there were or are people like these renders the environment unpredictable. If it hadn’t been for people like Mao Zedong, Gates, Steve Jobs or Nelson Mandela, where would the world as well as South Africa have been by now! We might even add Jacob Zuma and the Guptas to the list asking where South Africa could have been, had it not been for the destruction caused by these few individuals.

So how do we address this uncertainty? We acknowledge that it exists. We realise that the past will not necessarily be repeated in the future, no matter how much we intuitively would like to take from the past what suits our current story most.

What is also important, is to realise that the world is subject to structural changes. The 2007 launch of the first iPhone is considered a black swan event which revolutionised the world as we knew it then. Events like these make it exceedingly difficult to imagine history will simply repeat itself. However, they also bring advancement. Today, the world is a much better place than it was 50 years ago. And, if we remember that investment economists are not prophets, then all of us have a better chance of investment success.