Last week, we had the pleasure of attending the annual forecast dinner hosted by The CFA Society of Austin. The CFA Institute is a global association of investment professionals dedicated to developing and promoting the highest educational, ethical, and professional standards in the investment industry. Once a year, the local society brings in some heavy hitters from the national investment stage and asks them to share their thoughts on the outlook for the coming year.
The evening opened with an address from keynote speaker, Howard Marks, author and CEO of Oak Tree Capital Management. The title of his presentation was “Uncommon Sense for the Thoughtful Investor”. One of his main points was that no one really knows what is going to happen in the financial markets and we should all be very skeptical of anyone who pontificates otherwise. He punctuated his talk with several humorous (and wise) quotes, but this one from Mark Twain kind of sums it all up: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
Of course, this being a forecast dinner, Mr. Marks did have to share his opinion on the future. A self-described pessimist, he stated that he believes there will be a “new normal” for stock market returns going forward. Specifically, he said that U.S. investors should expect average returns of 6% – 7%, versus the double-digit returns that stocks delivered from 1980 to 2000. His rationale was heavily tied to the amount of deleveraging that still needs to take place in the United States and Western Europe. Mr. Marks is a dyed-in-the-wool value investor and a highly respected professional in our industry, but at the end of his presentation, he seemed to have a lot more confidence in what he did not know (about the future) than what he did know.
The evening concluded with a moderated panel of two more industry heavy-weights–Robert Doll and Robert Arnott. Mr. Doll was cautiously optimistic about the future, while Mr. Arnott was quite negative. The primary issue from Mr. Arnott’s perspective is demographics. He is particularly concerned about Western Europe and Japan, due to their aging populations and low birth rates. What is so interesting (to us), however, is that he also said that European stocks might produce the highest return in 2012. Since they are so unloved at the moment, any amount of good news will certainly be a major surprise. In fact, he went on to say that one of few investment strategies that he has found to work almost every time is to buy whatever makes you feel least comfortable to own. In order to be successful with that approach, however, you must have a very strong stomach and (usually) a very long time horizon.
Truth be told, we love forecast dinners. Not because they provide us with great investment ideas, but that they reinforce our conviction that no one can consistently predict the future. Therefore, our “secret” tips for 2012 are to remain invested, be diversified, employ common-sense, and don’t follow the crowd.