The Year in Review—2007, Very Unpredictable

As we begin 2008, I am starting to feel that life, except for the stock market, is too predictable. As Thanksgiving concluded, the news headlines focused on how weak the holiday shopping session would be (as they always do). It turned out the season wasn’t that bad and was actually higher than the prior year’s spending (as it always is). Once the holidays concluded, ads on radio and television promised us the same three things they promise us every year: (1) how to eliminate all our credit card debt (I wonder how we managed to accumulate that debt if we, indeed, didn’t buy anything during the worst holiday season ever?); (2) how to lose weight instantly (correctly assuming, at least in my case, that we all put on a few pounds over the past months); and finally, (3) how to get rich quickly with some new technique that allows you to work from home for only minutes a day while producing such spectacular results you retire to the golf course or boat daily!

The cycle described above is just a few months out of the year. There are other cycles and rituals that go on each and every year by which we could equally set our collective watches. If much of the rest of life is so predictable, why are the financial markets so unpredictable? As Bill Few and I used to kid amongst ourselves, if we could predict the market, we would be retired on our own personal island somewhere. It is reminiscent of the promise of the people on late night television who peddle their books and tapes to teach you how to make millions in real estate, stock trading, currencies, etc. If they really could make millions doing that, they would not need to sell you anything!

My personal theory is that financial markets are not as predictable as we would like because they are driven by people and, as investors, people are not as predictable as we would like! Financial markets, on a day-to-day basis, can be very volatile based on the collective difference of opinions of investors. At Bill Few Associates, our job is and has always been to encourage you to look at the long-term trends (up) and to diversify you away from as much of the volatility as we can. The year 2007 was a year where most investments finished up, although below trend. Yet, the daily gyrations in both stocks and bonds gave investors quite a hectic ride.

Just the facts As you can see in the chart below, stock returns for 2007 were mostly up, but lacked direction in the second half of the year.