Beware predictions and prophets of trends
The dangers of relying on human memory and trying to buy “trend” winners
One of the podcasts that sticks with me most, in terms of the poignancy of the lessons learned, is a Revisionist History episode called “Free Brian Williams”. I won’t give too much away but the crux of it is that the memory of human beings, especially our memory for how we felt and when we did things, is completely fluid and often fabricated post-hoc. Place is more reliable, but everything else is as flimsy as a Michael Fish forecast!
Anyway, as we approach the Christmas period, hopefully with more optimism, I thought it might be interesting to look back on this “unprecedented” (most used adjective of 2020 surely) year. Indeed going through some of my previous Friday Views I came across one in May highlighting the predictions being made by Next, I had titled the email Everything has “changed forever”…apparently.
At the time Next (renowned for its calm and incredibly clear guidance) was assuming that Q3 sales would be 26% below last year and Q4 would be 22% lower, at the same time The Economist published a full red page with the words “The 90% Economy” plastered on the front — everything looked pretty bleak. 5 months later, at its most recent trading update in late October, Next revealed that Q3 full price sales came in +4% UP on the previous year and its central assumption was now for sales in Q4 to be only 8% lower yoy. The stock is up >40% since that bleak point in May, outperforming its peers and the UK market.
Next: in May planning for -35%
Next: 5 months later
This is not to malign the forecasts being made in May, most companies weren’t giving any guidance, but more to recall that we are generally terrible at predictions, especially those made at the point of maximum pessimism (or optimism). In the wake of COVID, you can find countless articles and research calling for accelerations in overarching “long term trends”. Companies seem to have got in on the act too as the chart below shows.
Perhaps there is credibility to some of these predictions however, as we have written about before in a blog post, this doesn’t necessarily mean that incumbents will benefit from this, which is why we focus entirely on bottom up analysis. Our negative views on stocks like LTG, Future and Basic-Fit all contain an element of this approach.
Indeed one of the big problems that often gets forgotten in the short run euphoria is that if a trend is in motion then huge swathes of capital are equally happy to invest in that too. Judging by markets or the VC financing going on in Europe at the moment there is still no shortage of capital trying to find a return.
This investment creates a massive surge in supply to meet the trend. Electric vehicles currently spring to mind but this enthralling Contrarian Investor podcast with Jamie Catherwood of Investor Amnesia details the treasure hunt bubbles of the 1600s, the stock participation of the 1700s and the bicycle craze that swept London in the 1890s just as a starter.
As we head into a new phase of post-vaccine normality and planning, there will be many predictions made about pent up demand or structural shifts sticking. Again this is not to discredit these, because many will be correct, but to remind you to recall the fallibility of human forecasting and equally remember how you felt at the point of maximum pessimism. Stay alert!