Cubs, Trump, Dow industrials all beat the odds. December forecast: Pigs fly?

Kent Kramer, CFP, AIF, is chief investment officer/lead adviser at Foster Group. He writes about investing for IowaBiz.com

Like many Americans, I keep looking out my window for pigs with wings ... the euphemism “when pigs fly” having been recently invoked for:

  1. The Chicago Cubs winning the World Series after a 108-year drought, finding themselves down three games to one to the Cleveland Indians on Oct. 30 (15% probability*).
  2. Donald Trump winning the United States presidential election after an aggregated index of national polls gave him less than a 3-in-10 chance to win on Nov. 8 (28.6% probability*).
  3. U.S. stock market indices reaching all-time highs within 24 hours of Nov. 8's unexpected election results, given the plummeting futures markets as election returns were tallied in the early morning hours of Nov. 9. (Dow futures down over 5% at 1:30 a.m. EST 11/9/2016.+)

For each of these three outcomes, the odds against them occurring were very long. In other words, those professions specializing in making predictions (bookies, pollsters, certain hedge funds) ended up being wrong in historically significant ways.

In the days leading up to the recent election, I had the opportunity to speak with a number of audiences and investors about what (if anything) the coming election meant for financial markets and portfolios. As tempting as it was to make a prediction, after 22 years of observing investment market behavior as a “professional,” I resisted, knowing that the odds of making anything like a correct prediction were no better than 50-50.  

Sports fans, political observers and many investors can’t seem to help themselves when it comes to the temptation of making predictions. We watch the news, talk with friends and colleagues, read the pundits, editorials and analysis, and we believe that we can “see the writing on the wall.” While it’s fun to do this with our sports loyalties, it’s potentially disastrous to act on our predictions when it comes to portfolios.

There were professional and institutional investors on the wrong side of that 5% fall in the value of Dow futures. They were predicting a very negative impact on U.S. stocks as a result of the surprising election outcome. However, as U.S. markets began the trading day Wednesday morning following the election, the Dow Jones industrials index opened down a minuscule 0.08% and closed the day up 1.4% at a new record high+. Taking investment actions in line with those negative predictions in the early hours proved very costly.

In a recent white paper on the benefits of diversification, researcher Wei Dai, Ph.D., finds that under many conditions diversification not only reduces volatility, but, “For all investment horizons, there was a substantial increase in the reliability of outperformance as the portfolios become more diversified.”++ Dai was researching U.S. stock portfolio strategies formed around varying degrees of overweighting to value and smaller company stocks and how taking a more or less diversified approach affected results.

For investors who are thinking about how to position their portfolios for higher probabilities of outperformance, Dai’s conclusion supports the idea that consistent diversification over longer time periods is a more reliable strategy for both reducing risk and enhancing return than acting on short-term predictive models using timing models and smaller numbers of stocks.

* Both according to FiveThirtyEight.com a leading statistical modeling website for sports, politics and economics.

+ Wall Street Journal, Nov. 9, 2016

++ "How Diversification Affects the Reliability of Outcomes," Wei Dai, Ph.D., Dimensional Fund Advisors LP

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The granddaddy of all succession plans

- John Mickelson, founder and managing partner Midwest Growth Partners, is IowaBiz's blogger on succession planning. Read more about him here. 

On November 8, U.S. citizens went to the polls and voted for who they believed should be the next President. President Obama, who is ending his second and constitutionally mandated final term, will hand over control of the executive branch of the government to President-Elect Trump on January 20.  

Wanting to escape from a monarchist system, our country’s forefathers’ setup this mandated transition of powers – which is just a big succession plan. This succession plan faces similar issues as you do as a business owner developing and executing a succession plan.

Here are some decisions that President Obama and President-Elect Trump may face, which are synonymous with what a seller and purchaser of a business might also face:

President Obama (Outgoing Business Owner)

·       Legacy – feel responsibility to have work done continued and reputation held in high regard.

·       Relationships – want to ensure loyal supporters are taken care of.

·       Future for family – want to make sure family is financially secure, safe, and well-adjusted to a new environment.

·       Time – figure out what hobbies, causes, and interests will occupy new found time.

President-Elect Trump (Purchaser of Business)

·       Strategy – what did predecessor do that should continue and what should change?

·       People – who should surround as trusted advisors?

·       Systems – need to setup procedures and protocols that fit the newly assembled team

·       Communication – clearly communicating a vision to different constituencies is important in first 100 days

If you are thinking about selling your business as part of a succession plan, a "transition team" just like President Obama and President-Elect Trump are using right now is vital to achieving your unique goals.

Identifying a gap or niche and taking advantage of it

Kelly Sharp is the owner of the Heart of Iowa Market Place in historic Valley Junction.

In life and business, it's always so much easier to see what's there when we should also be looking for what's not there.

That's because the "what's not there" can make as big a difference for all of us, particularly specialty retailers, as the "what's there." It's important to know that I'm not saying niche retailers should start offering new products or services just for the sake of doing something new or different.

Just the opposite.

Filling gaps has the vital purpose of meeting your customers' needs so they don't go somewhere else. It's about making sure you don't give potential competitors a foothold into your specialty. Identifying new niches is all about complementing your existing experience as much as or more than it is about expanding it.

For example, I've recently started adding my own branded product lines at the Heart of Iowa Market Place because some items I wanted to carry just weren't available. What better opportunity to brand your business than to consider the same approach? (In fact, don't just consider it. If it makes dollars and sense, do it!)

In my case, we'd offered a book with images of Iowa that sold very well, but there were no other books in the price range or style my customers wanted. Instead of losing out on sales, I decided to do something about it. I found a wonderful local photographer, Justin Rogers, and together we've created a beautiful new book that will come out shortly.  

As I look at my store and other new business opportunities, I try to find that niche or gap in the marketplace. It's much, much easier to be successful if the pool of competitors is smaller and you're filling a real market need.

Always ask yourself, "What are we missing? What are we not seeing that we should be seeing? What are we not doing that fits with who we are? And, what can we be doing to improve the customer experience, build our brand and make us more profitable?"

Asking those questions on a regular basis will not only help you identify dangerous gaps and promising new niches, it will help you take advantage of them in a big way.

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