By Jeffrey Baumert
NEW YORK (AdviceIQ) -- Gardeners have a lot to teach investors about how to plan with an eye toward long-term trends and to adjust that in light of unfolding events.
Just look at how many individual investors fled the stock market in the wake of the 2008 slump. They bolted even when the market began a powerful rally off its March 2009 low point -- a rebound that brought stocks to new heights and erased the losses from the downturn. While these investors are returning now, many missed that ride up.
And that's despite longstanding research that shows stocks, over time, trend higher. As Wharton professor Jeremy Siegel shows, equities are the asset class that historically delivers the best growth, notwithstanding the occasionally punishing bear market. His classic book, Stocks for the Long Run, demonstrates how stocks averaged a 7% return yearly after inflation over the past two centuries.
Economic and market forecasting involves high technology, system modeling and academic research, as well as committed and well-educated economists and investment strategists. As good gardeners know, experts put out useful forecasts, but it is important to remember that specificity is often not as accurate as we might hope it to be.
Investors are wise to follow the lead of the master gardeners and prioritize long-term trends while allowing for very minor adjustments with near term information. This approach helps avoid damaging mistakes that result in having to start the garden over from scratch and ultimately delaying the harvest.
The field of weather forecasting also involves high technology, system modeling and academic research, as well as committed and well-educated meteorologists. Every day we can hear or read what the weather is supposed to be tomorrow or even 10 days from now. Generally, the more near term the forecast, the more reliable it is.
But even that is not always accurate. It is not without some legitimacy that weather forecasters are occasionally referred to as "weather guessers." Still, there are times we rely so much on forecasts that when the actual weather deviates the result is devastating. In the Atlanta area, where I live, a winter storm shut down the metro area in February, though the forecast was for the storm to pass to the south of the city.
With gardeners, the question of when to plant is based on long-term trends, but in the short term it hinges on forecasts. For a number of weeks in April, we had more than 40 tomato plants on a temporary table in front of large windows in our living room. The plan, my wife the master gardener told me, was to allow the seedlings to get a good start while protecting them from potential cold0-weather damage.
Apparently the local master gardener's official no-earlier-than planting date is April 15 for our area and is considered a safe bet. Being curious, I of course went in search of the data which led me to The Old Farmer's Almanac website, which says there is a 50% chance of no freezing temperatures as early as March 24.
I understand not wanting to plant at the risk of a coin toss, which is why their planning date is so much later. In fact, by deferring one week, they reduce their chances of loss to less than 3% with freezing temperatures in only 15 out of 788 samples from April 1 through April 14 back to 1960. Clearly, they could plant earlier than April 15 with very little chance of loss.
Of course, planting earlier might mean fresh juicy tomatoes earlier in the year, but it also increases the chance of having to start over after an unanticipated freeze, which would ultimately delay the harvest.
Forecasts are tricky, and can be misleading, especially in investing. A 2012 McKinsey study found that companies' failure to meet analysts' consensus earnings estimates hardly ever translates to major long-term problems for the business. More than 40% of companies come in below estimates. One reason is that analysts are endemically over-optimistic.
Knowing this, you shouldn't hurry to sell a stock once you hear of its earnings shortfall. Yet that is what a lot of people do. McKinsey points to investors' over-reaction when auction site eBay missed the fourth-quarter 2004 consensus by a penny. The stock promptly fell 22%. And while eBay had a rough patch like other retailers during the Great Recession, the market's view of it now is as an online powerhouse, what with its ownership of payment service PayPal, Web ticket trading service StubHub and other units.
On a broader level, forecasts of the entire economy often are off the mark, as Len Berman, a Syracuse University professor, points out. The Congressional Budget Office, for instance, originally forecast 2.3% economic growth in 2008 and 2009. The economy ended up shrinking.
It turns out that this year on planting day, we had temperatures below freezing. No worries -- we didn't lose the tomatoes. My wife and her wise gardening friends were smart enough to watch the near-term forecasts, deviate a bit from their original plan and delay the planting date a few days.
-- By Jeffrey Baumert, a partner at Advisor Financial Services in Woodstock, Ga.
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