Monthly commentary

It has for a long time seemed bizarre to me that investment markets react to data published by assorted goverment and private statistical organisations as if it was gospel truth. Market valuations across the globe will vary by trillions on a daily basis just because a number comes in ahead or below some sort of expectation – even when that expection is no more than a few telephone calls cobbled together to generate an average prediction by the likes of Reuters or the FT. What’s more the data that moves markets is quite often corrected later and interestingly, the corrections receive little passing comment and rarely move markets!

This is yet another of the human behaviourial aspects of short term market valuations that investors need to understand so that we do not get overly worried about the random hazards of transaction timing and short term portfolio valuation swings.

A headline in today’s FT intrigued me. I can’t see the full article because I am not an FT subscriber, but the implication is that the fact that many large Americam corporations use accountancy tricks to re-allocate revenue, including that generated in the UK, through the Dublin financial centre (a sort of freeport) is resulting in inflation of EU data on corporate incomes. I suppose that may even count in the GDP calculations – I don’t actually know.

The technical details of what is happeneing don’t really matter. What this brings to our attention is the fact that economists and investment strategists (a sort of ‘astrologist’ that some investment houses employ!) often make predictions based on data that is collected unscientifically, is too narrow in range, is not actually the data relating to the economic factor being assessed or is just educated guess work, or even just a reuse of a ‘concensus’ number.

I saw some charts yesterday showing the predictions of all the major global banks about this year’s growth in the Chinese economy. They were laughable, even though they were no doubt produced by teams of people who were collectively earning many millions in salary. The numbers centred around what the Chinese government itself predicts (free data) and went up or down over the last 12 months according to news coming out of China. That is about as clever as me saying the car is slowing down because my foot is on the brake pedal, or we will be going faster soon because I pressed hard on the accelarator!

The long term value of shares will always revert to the actual valuation of cash flows (ie profits and dividends). Short term valuations are the result of speculation and algorithmic trading and importantly human reactions to news flow which sometimes is based on the flimsiest of factual or pseudo factual reasoning.

We can benefit from this understanding by working out what the market does not want to acknowledge is good value because the data thought to relate to the assets in question is simply misunderstood or inaccurate. At the moment, there are shares in the UK that fall in that opportunity set.