This week I received a newsletter from a market commentator who expressed surprise at the current levels of the Rand compared to the US Dollar. At R15.50/USD, the Rand was the best performing emerging market currency over the last month. According to the publication, the Rand is widely tipped to further advance in the months ahead due to a range of factors; this over and above the sheer scale of its earlier losses.
In March this year when the Rand traded around R18/USD, the same publication expected that a Rand recovery below R16 would be a long way off. They expressed a strong conviction that in our new reality a recovery back to pre-Corona levels was very slim.
This contradiction, to put it kindly, highlights common behavioural problems with forecasting. Humans find it very hard to imagine a change in trend or a reversal in the most recent fortunes. We generally lack the imagination to imagine the unimaginable.
It further illustrates that we are prone to fear. We are programmed to imagine the worst. It’s an evolutionary safety mechanism in our brains. Somehow, we attach more value to negative news and think that people who tout doom and gloom must be more intelligent than those who have a more positive disposition. We also value information that agrees with a tendency to expect the worst.
These behavioural responses highlight that we don’t have a clue when it comes to forecasting currencies over short periods. Even if we had a clue, we get the reasons wrong and we get the conclusions wrong too.
Over the very long term, the Rand will depreciate if our inflation rate is higher than that of our trading partners’. However, along the long-term trajectory, the Rand oscillates violently, sometimes strengthening for years and at other times weakening relentlessly. Being aware of our behavioural responses to these trends or disruptions can teach us to pause and consider the unimaginable before we act. We can learn to watch for massive fear or greed and to be careful not to simply extrapolate the most recent trend. It’s at these inflection points that we can destroy wealth permanently – when the temptation is at its highest to move with the trend.
Finally, we can learn to treat all these forecasters as financial entertainers or providers of interesting dinner table conversation snippets. We should rather channel our energy into something more worthwhile, something we can control with more certainty such as our savings rate or our withdrawal rate from our portfolio in retirement. There is always the option to rather read real fiction too.
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//20 November 2020