We are asked many questions as we speak to investors: Where’s the market’s going? Where will the market be at the end of the year? Where are interest rates going? Often our honest answer on these (and similar) questions is ‘we’ve got absolutely no idea at all’. Some investors see this as a total abrogation of our duties while others can’t believe we don’t have a well thought out and articulated idea.

It is notoriously difficult to predict market movements over relatively short periods. Perhaps we should just join the talking heads and offer our opinion in the hope that it will be forgotten if we are embarrassingly wrong but that we will be lauded for our foresight if we are correct. However, this seems both dishonest and a complete waste of time. In general, the questioner will get a far higher quality answer by flicking a coin.

What about seemingly more meaningful questions such as the future direction of short-term interest rates? Once again, history tells us that the majority of strategists get these questions wrong the majority of the time; but putting this aside we often wonder what the questioner would do with the answer even if we were to provide one. Markets are not so straightforward that they always react in the same way to an economic variable (and even if they were, that arbitrage would soon be competed away).

In a similar vein, we even take an agnostic view of those macro-economic variables that would seem to be relevant to how we build our portfolio. For example, we are often asked why given the ‘obvious’ pressure under which the UK consumer is currently suffering, why on earth we would be overweight so many consumer stocks.

As contrarians, we are only attracted to stocks after they have already fallen significantly. By the time these stocks enter our universe they have already have an embedded consensual view priced into their valuations. Therefore, if the consensus view is that the outlook for consumer spending is poor then this will already be discounted in the price. Therefore, for the shares to fall even further, the outlook would have to deteriorate even more than the consensus believes. Secondly, a number of companies in which we have invested have opportunities to improve their profitability by internal actions rather than rely on an improvement in the economic outlook.

Finally, if the consumer is really in as weak a position as the consensus believes, then interest rates will soon be cut very significantly which we assume would make the consensus very bullish.

We would rather build a portfolio with a reasonably large number of individual stocks each moving in their own share-price cycle in preference to having one macro-economic view which then needs to be reflected in all of the individual holdings. We believe the latter greatly increases the risk in the portfolio as performance can rely greatly on the accuracy (or otherwise) of a very variable variable.

Of course it is possible that in building up a portfolio through a series of individual stocks we could unknowingly expose ourselves to large risks. However, our natural reluctance to take very large positions in either stocks or individual sectors protects us from this risk and ensures we always have a well diversified portfolio of stocks.