Arbor Wealth: Hoosiers, Hackman, Hershey and The Almanac
Barbara Hershey: “The Almanac says it’s time to start planting.”
Gene Hackman: “Is The Almanac always right?”
Hershey: “Always.” — Dialogue from the movie “Hoosiers”
The Farmers’ Almanac is predicting a colder and wetter winter than usual for the Southeast. The Almanac “formula” claims to be accurate 80 percent of the time, and is as secret as my Mom’s Shepherd’s Pie recipe, which accompanied her all the way from Limerick, Ireland, to the U.S.
Most climatologists say this is, well, bunk. As meteorologist Jan Null tells author Jessica Hullinger in a recent article, “Any time you have science that’s shrouded in secrecy or politics, something is not totally kosher … (they’re) correct on the order of 25 percent to 30 percent of the time, which is no place close to the 80 percent … that is often claimed … If someone really had the answer to that (long range forecasts), think how incredibly rich they would be,” he says. “They would own the commodities market …”
Authors Gardner and Tetlock have recently penned “Superforecasting: The Art and Science of Prediction," a study of people’s ability to forecast. The book divides predictors into two groups: hedgehogs and foxes. Hedgehogs think the world can be boiled down to one or two ideas. Foxes believe that the world is dynamic and complex and attempt to draw conclusions based on their analysis of a variety of statistics and factors.
The best “superforecasters” were curious as to why they were right when their predictions were correct, and were just as interested in why they were wrong when their predictions missed the mark. Improving their forecasting performance was their goal.
Applied to investing, market hedgehogs might analyze one piece of data; market foxes are more likely to consider the sum of all market conditions. For instance, hedgehogs might rely solely on the Dow Jones Transportation Average for their market interpretation. Essentially, the theory compares the current Dow Jones Industrial Average with the Transportation Average. If the amount of goods being transported lags behind the state of current economic conditions, the theory espouses an expected decline in demand and an economic downturn ahead
But now, with coal (which is hauled by trains and trucks and shipped on barges) use in decline, and more energy (like natural gas) being routed by pipeline, this correlation is not so clear. The broader energy landscape is changing and there is a paradigm shift afoot. Foxes recognize this, and rarely “pigeonhole” their thinking on one piece of data, like transportation numbers.
Investors don’t need to be right all the time, just more often than not. They absorb, evaluate and apply changing conditions and economic information as it becomes available. Us older folks (call us foxes and not hedgehogs, please) consider it making educated choices.
Margaret R. McDowell, ChFC, AIF, a syndicated economic columnist, is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.