Dreary economic news and volatile markets can shake investors' confidence. One strategy in times like these is to adopt a contrarian approach to interpreting news developments.
Many academics describe the stock market as a highly efficient discounting mechanism - in theory if not always in practice, share prices should incorporate everything we know about the future.
That's why you see stock prices gyrate dramatically after earnings reports - what's important is not the actual earnings, but the reported earnings compared to the forecast. Come in ahead of forecast and stock prices rise to reflect this new information, disappoint and a company's share price gets punished.
That's why astute investors search out insights that aren't reflected in stock prices. For this to work, though, you have to be prepared to differ from the pack and defy conventional thinking - once an idea enters the mainstream, it no longer gives you an edge.
Take, for example, the peak oil theory, which argues that global oil production has peaked and will decline, driving up oil prices. Investors who acted on this theory early a few years ago did extremely well; latecomers who invested after oil prices had run up had their heads handed to them.
Which brings us to where we stand today. Despite all the attention to the "green shoots" popping up, the global economy still faces formidable challenges. With downbeat forecasts for growth and demand, unemployment, corporate profits, commodity prices and budget deficits as well as inflation concerns, the runup in markets since March 9 may mean the good news is already reflected in stock prices.
Extend your horizon out three to five years, however, and it's a different story - you can make a strong case that today's stock prices don't fully reflect important positives.
The role of innovation
Even with spending cutbacks, we're seeing huge investments in research and development. And it's not just the number of researchers at work - with computing power and the instant dissemination of discoveries via the Internet, scientists are more productive.
The stock market only reflects what we know - and by its nature has difficulty accounting for innovation.
In 1980, for instance, conventional wisdom held that computers had been a good business in the 1970s as mini-computers replaced mainframes, but growth would slow; almost no one saw the personal computer revolution coming. In 1990, the mainstream view was that computers had been a great business in the 1980s but would slow, as companies had purchased all the computers they needed. Almost no one saw the rise of the Internet and the evolution of the computer as a universal home appliance.
The drive to succeed
in Developing markets
Next, consider the educated youth and emerging middle class in developing markets, not just China and India but other Asian countries, South America and parts of Eastern Europe. Business people who travel to these countries are amazed by the work ethic, inventiveness and ambition among the middle class and younger generation.
With a move to open markets and lower global trade barriers, these countries will provide existing industries with formidable competition.
The resiliency of the
American psyche
Some investors have written the United States off as a fading empire - and certainly America faces issues with savings rates, the quality of its education and health systems, and record budget deficits.
Despite this, the U.S is still the promised land for the best and brightest from around the world and, if you look at economic mobility between generations, is the closest there is to a pure meritocracy. History suggests that anyone who underestimates the American capacity for renewal is making a grave miscalculation.
Getting superior returns over time requires going against the grain and having the foresight, discipline and conviction to seek out and act on insights others are missing.
In markets like these, it's easy to get caught up in the latest pronouncements by cable-TV oracles. Remember, they themselves are prisoners of convention and anything they tell you they're also telling millions of others - and they're the last place you're likely to find fresh insights.
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Dan Richards is president of Strategic Imperatives. He is a facultry member in the MBA program at the Rotman School at the University of Toronto.