Wrong-Footed

How did so many folks get it wrong?

Source: Morguefile

The Brexit vote reminds me of the comment that came from a New Yorker writer who was shocked by the 1972 landslide re-election of President Nixon. “I only know one person who voted for him,” she noted.

There was a lot of insularity and wishful thinking in the analysis of and reaction to the Brexit vote. Folks who live in cosmopolitan London—where most of the British press is located—favored Remain. And why not? They vacation in France, get nannies from Hungary, and drink duty-free Italian wine. The no-borders free-trade Eurozone is working pretty well for them. Why wouldn’t everyone want it to keep going?

In theory, we all live in a perfect market for information. We ought not to be surprised by any emerging trend. All we have to do is pull up Google Trends to see what’s hot. But we tend to select—and friend and follow—folks we agree with. We’re more comfortable with them. Call it tribal thinking, or the Big Sort, or whatever you want. We block out information that threatens our prior assumptions about the world.

Source: Google Trends

The Brexit race was tight. All the polls showed that. But the Scottish independence referendum in 2014 polled tightly, and undecided voters broke decidedly in favor of the status quo. So on the day of the Brexit vote, stocks around the world rallied on the expectation that this vote would go the same way—towards Remain, which represented the status quo. And most market-makers in London wanted Remain to win. It was hard to find a financial analyst from the UK who thought Leave was a good idea. When Leave won, markets got caught leaning the wrong way. That’s one reason why the market’s reaction on Friday was so sharp.

“The wish is father to the thought,” Shakespeare wrote. Wanting something to be true won’t make it true. We need to be sure we test counterfactuals and seek out contrary opinions. The future is uncertain. Be sure you don’t invest yourself emotionally when you invest your money.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2017-07-17T12:21:54+00:00 June 30th, 2016|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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