Tis the season for stock market forecasts and macroeconomic predictions for the year ahead. But one of the best investment decisions you can make at this time of year—with both your money and your time—is to ignore them all. 
To see why, pretend it is December 1974. You are lucky enough to come across an outlook piece written by a forecaster with 100 per cent accuracy.
Nevermind that you’d have a better chance of meeting Elvis and Santa Claus in the same afternoon than finding one of these creatures in real life, but let’s stick with it as a thought exercise.
Firstly, the article correctly predicts that smoking will be eventually banned in most public places. On top of that, the tobacco industry will be subject to costly lawsuits and onerous regulation.
Secondly, it also predicts that computers and smartphones will become nearly impossible to live without for the vast majority of humanity.
With that vision of the future in mind, would you have invested in technology or tobacco stocks? It would seem like an easy decision, but history tells a different story. A £1 investment in IBM, the obvious way to play technology at the time, would now be worth £50. But over that same period, a £1 investment in British American Tobacco would have grown to £6,500.
One reason why even perfect foresight would have been useless in this example is that growing industries tend to attract a growing list of competitors.
So it wouldn’t have been sufficient to predict the broad boom in technology adoption—you would have also needed to predict all of the decisions IBM would go on to make in subsequent years, not to mention other changes in the technology itself. As it happened, IBM grew complacent and failed to anticipate the boom in personal computing. It wasn’t a terrible investment, but was far from being the biggest winner.
In contrast, the low-tech and litigation-prone tobacco industry experienced a decline in competition, leaving the incumbents with the ability to make monopoly profits as existing competitors left the business and no new entrants came along to replace them.
The same dynamic applies to macroeconomic forecasting. Looking back over more than 100 years, Japan has had the highest economic growth rate while South Africa had the slowest. Believe it or not, South Africa was the better long-term investment. How can this be?
There are several reasons why economic growth and investment returns don’t necessarily move in tandem. In particular, competition may reduce profitability and excitement about growth may drive up valuations, both of which reduce future returns for shareholders.
The lesson here is that the relationship between economic growth and stock market returns is tenuous. Even if you were able to make consistently reliable macroeconomic forecasts—a big “if”—it would not be a guaranteed way to reap superior returns.
Of course, some fast-growing markets and industries can be great investments—but you should be highly sceptical of those who claim to be able to identify them in advance.
You should also keep your emotions in check. Growth stories have an almost irresistible allure for investors. Whether it’s the latest hot IPO or crypto-currency, investors too often get carried away and ignore the price they are paying. The combination of confidence and dubious predictions is a dangerous cocktail.
Or as Mark Twain put it more eloquently: “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.”
Dan Brocklebank is director at Orbis Investments. The views expressed above are his own and should not be taken as investment advice.