Donald Trump's Key Lesson For Investors: Beware Of Experts Bearing Predictions

Includes: GOOG, GOOGL, JNJ, KO
by: Boris Marjanovic


We were told that Donald Trump would never be elected president.

We were told that a Trump win would crash the stock market.

Both of these predictions were dead wrong.

If Trump has thought us anything, it is to ignore prediction-makers.

"All swans are white." This was the pre-18th century European equivalent of "Pigs can't fly." It was considered an obvious, irrefutable fact until, in 1697, a group of Dutch explorers in Australia discovered the impossible - black swans. From then on, these (very) ugly birds became the poster child for "something extremely rare." The famous trader and quant, Nassim Taleb, later expanded on this definition, adding that "Black Swan Events" are unexpected events with severe consequences.

The key word here is "unexpected." It implies that Black Swans are relative to knowledge. In other words, a Black Swan for you might not be a Black Swan for me; and vice versa. 9/11, for instance, was a Black Swan for those in the buildings, not for the terrorists flying the planes. And 2016's presidential election outcome (the topic of this article) was a Black - make that Orange - Swan for nearly everyone, including most Republicans; but not for Michael Moore, Noam Chomsky, and a few other non-establishment outsiders, who saw the Donald Trump train coming all along.

The great irony is, Trump's stunning victory shouldn't have been such a shocker. It just seemed that way because, like with the recent Brexit fiasco, the biased mainstream media told us, over and over and over again, that it couldn't happen. The media, in turn, was fooled by the election fortune-tellers. Relying on polls that massively oversampled Democrats, these professional charlatans arrogantly predicted a landslide Hillary Clinton victory. To say that Trump made a total mockery of them and their bad prediction would be a laughable understatement.

Consider the best-known political number-crunching hotshots, Nate Silver (FiveThirtyEight) and Sam Wong (Princeton Election Consortium). On the eve of the election, the former predicted the likelihood of a Clinton win at over 71% while the latter put the chance of a Clinton win at 93% (close to a certainty!). By the way, these aren't cherry-picked examples. All widely-followed models, including those of the New York Times and betting website Election Betting Odds, rated Clinton's chances in the mid to high 80s%.

But the election outcome isn't the only thing these pseudo-experts got wrong. We were also told that a Trump win would crash the market. "Wall Street fears a Trump presidency. Stocks may lose 10-12% of their value if he wins," said Justin Wolfers of the New York Times. Bridgewater Associates, the world's largest hedge fund, made a similar prediction. In a note to investors, the fund forecasted a 10%+ drop for stocks should Trump take the presidency. Perhaps the silliest prediction of all was the one made by Dallas Mavericks owner Mark Cuban: "In the event Donald wins, I have no doubt in my mind the market tanks."

The chart below shows what actually ended up happening. Initially, at least, the predictions were on point. After it became obvious that Trump would win, panic selling ensued. By around midnight (Eastern Time), the S&P 500 futures index had plunged more than 5%. In the New York Times, the highly overrated economist Paul Krugman wrote, "If the question is when markets will recover, a first-pass answer is never." Well, a second-pass answer should have been, several hours later, because by noon the next day, stocks were back to pre-election levels.

Source: A North Investments

Ever since then, the market has been on a tear, hitting record high after record high. The financial prophets - the very same ones who were so hilariously wrong before - have dubbed this the "Trump Rally" and are now prophesying that the good times will continue rolling. But they'll probably be proven wrong once again. The problem with predictions, to paraphrase baseball-playing philosopher Yogi Berra, is that they're very difficult to make, especially about the future. Events rarely unfold in the manner that even the top minds, aided by sophisticated mathematics and ever increasing computing power, think they will. In short, like it or not, the future is shrouded in a cloud of perpetual uncertainty.

That's why no one at the Fed saw the Great Recession coming in 2008. That's why political risk analysts were caught off guard by the Arab Spring in 2011. That's why OPEC didn't expect oil prices to crash in late 2014. That's why 2016's Brexit came as a shock to the ruling elites in Europe. And that's why no one knows how exactly a Trump presidency will play out over the next four years, not even Trump himself. My advice: beware of suit-and tie-wearing "experts" bearing predictions, because they're as ignorant about the future as you are.

That said, it's not all doom and gloom. While I don't know what erratic Mr. Market will do tomorrow, I can be pretty sure that Coca-Cola (NYSE:KO) will sell a lot of soft drinks next year. I have no idea who'll win the Super Bowl, but I'm willing to bet people will continue posting and watching videos on YouTube (NASDAQ:GOOG),(NASDAQ:GOOGL). Demand for Johnson & Johnson's (NYSE:JNJ) medical devices will probably remain high, regardless of which party wins the 2020 presidential election. The point here is a simple one. A well-established, financially sound business has a very good chance of remaining one. This is a timeless statistical truth that all investors need to be reminded of regularly.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.