Tomorrow’s going to be my last post for the year. It’s been fun. Thanks a lot for all of the questions, emails of support and post-fact grammar and spelling corrections. Hopefully I’ve helped in a small way to make a bit more sense of the world of finance and put a smile on your dial every so often. My last note tomorrow will be on why your electricity bills have been going up so crazily this past year, but for now I wanted to give you my why. Why I write these posts.
In early 2008, a leading analyst at Goldman Sachs predicted oil prices would move hit 200 US dollars a barrel. At that time, oil was trading at just over USD100 dollars and his “call” was paraded through the media with headlines of a new “super spike” for the commodity. Given the hyperbolic nature of the prediction, the firm received significant coverage, and it was picked up by newspapers, financial shows like Bloomberg and CNBC and the blogosphere in equal measure.
On the 11th of July that same year, oil hit a record peak price of 145.27 USD. 6 months later, it was trading at below 40 USD.
How could they get this so wrong? A Goldman Sachs propeller head arguably has some of the best resources available to help them understand, dissect and evaluate the oil market. From access to corporate insiders, to cross referencing intel across their vast network, to the intellectual capital retained by the firm and added to, by its Harvard, Oxford et al alumni. Yet with all of this at their fingertips, how could they get this so wrong?
Today, nearly 10 years on, oil hovers around the 50 US dollar mark, and that analyst, who ultimately made the highly coveted partner designation at Goldman Sachs (no doubt earning many millions of dollars a year along the way), is long gone. Interestingly, the new breed of analysts at the same firm only a few years ago were calling for 20 USD oil. Whilst the correctness of their call will yet be seen, three things are certain.
- First, financial analysts will continue to make large sums of money for their educated guessesimates on what is going to go and what is going down.
- Second, financial analysts will continue to make outlandish, headline grabbing predictions, in an effort to stand out from the crowd and receive free publicity (regardless of the likelihood of their predictions).
- Third “mum and dad” type investors will continue to use these predictions to help inform their own investment decisions.
I believe that some of the best and smartest minds are in the financial industry. I also believe that these minds genuinely think they know more than the average punter when it comes to stock analysis, portfolio management and economic forecasting. What has also become astonishingly clear, is that neither intelligence nor knowledge are true panaceas for consistently making money for other people over time. The important nuance to that sentence is for other people. Those with knowledge and intelligence, or perceived knowledge and intelligence can do a great job in the long term of making money for themselves, in fact, it is precisely what the financial industry is designed to do. Skim a little bit off of a lot of people to make effectively a riskless profit for themselves. In the end, it doesn’t matter if they are right or wrong, technically they have no skin in the game. They are risking YOUR money to make money for both you and them. But, even if they don’t make money for you, they still make money for them. And therein lies the fundamental problem with finance. It’s the few who make money off the masses.
Having been in finance for over fifteen years the only thing I know definitively is that no-one can tell you with any certainty what is going to go up or what is going to go down. Anyone who claims to know, is deceiving you. Intentionally or not, they are deceiving you. Calling the market, picking stocks or predicting where the price of oil is going is no different to betting on sporting outcomes, where you think you have an information/knowledge advantage. Sometimes you’re going to be right, sometimes you’re going to be wrong, but in the long run only the betting agencies are guaranteed to make money.
I’m not writing to tell you what is going to go up or what is going to go down, cause I don’t know. Just look how incredibly wrong I’ve been on Bitcoin all year. #embarrassing. I’m writing to help you understand why things are going up or going down, how the overpaid guesstimators think about why things are going up and down and to help you to think about some of the things you should be thinking about with your own personal finances. 5 MinuteFinance is not about telling you how to make money. It’s about helping you to understand it.
Hopefully its helping.
Anyway, that’s 5 Minutes. Thanks for reading.
Categories: General Finance