Don't let it get away!
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Most financial predictions are rubbish. Yet I think it's very important to consider them.
Investing legend David Einhorn explained why it's important when I asked him -- a year or so ago -- whether he'd buy, sell, or hold the S&P 500. He replied, "Not sure -- there is a wide range of outcomes on both sides. But our approach is to construct a portfolio that is capable of producing attractive returns with a variety of different outcomes."
As investors we need to think about possible outcomes. That's why I paid close attention to the recent panel titled "Pundits, Professors, and Their Predictions" at the recent World Economic Forum in Davos, Switzerland. Here are three predictions that came out of the session.
Prediction No. 1: Bottom-up movements will continue to reshape our world.
One of the most interesting predictions came from Thomas Friedman, a writer for The New York Times. He believes that bottom-up movements will continue to reshape our world in the future and that our hyperconnected planet is one of the biggest features of modern life.
Friedman argues that we no longer live in a world with one-way conversations between elites and citizens or customers. Rather, we live increasingly in a world of two-way conversations. This is a big trend to be cognizant of in the future, according to Friedman.
As evidence for this view, he talked about how Reed Hastings, the CEO of Netflix (Nasdaq: NFLX ) , tried to change the company's business model and pricing. By not engaging in a two-way conversation, Netflix lost customers and suffered a huge public-relations disaster.
Friedman also showed how a grassroots protest in Egypt led quickly to a revolution in January and February of 2011. He called attention to the Internet-based anti-SOPA movement, which successfully blocked legislation that was being supported by media powerhouses Time Warner (NYSE: TWX ) and Viacom, among others. In the coming years, Friedman believes that grassroots movements that receive leadership from interested parties will make a huge difference in our world. Investors may want to consider a company's leadership style when deciding whether to buy shares. They might also want to know whether a company can tap into a large and growing base of users to engage easily in two-way conversations. LinkedIn (Nasdaq: LNKD ) is just one example of a company that may benefit from this trend, which it helped create.
Prediction No. 2: Europe will struggle mightily in the coming years.
Europe will continue to struggle? That can't be a prediction. Don't we know that already?
Actually, the panelists seemed to be far more pessimistic on Europe than I initially would have thought. Panelist Nouriel Roubini, who was nicknamed Dr. Doom for his pessimism during the financial crisis, was particularly bearish on Europe. He thinks there is no leadership there and that the European countries are incapable of solving their monumental problems.
He implied that the real issue was whether Europe will be a slow-moving or fast-moving train wreck. And he envisioned that some countries will leave the eurozone completely. Greece is likely to be the first to go, according to Roubini. Then, maybe Portugal. He thought there was a 50/50 probability that the eurozone will break up entirely.
One thing that everyone seemed to agree on was this: If Europe suffers a spectacular collapse -- the fast-moving train wreck, in Roubini's words -- then the rest of the world's economies will suffer considerably. As investors, we need to be aware that there is considerable systemic risk in our markets right now. Even though Bank of America (NYSE: BAC ) and Citigroup (NYSE: C ) -- two big banks that have suffered from uncertainty in Europe -- were up considerably in January (28% and 17%, respectively), that doesn't mean we are out of the woods yet.
Prediction No. 3: Asia will have a great year.
While Europe's prospects look bleak, Asia's outlook is more hopeful. Kishore Mahbubani, a dean at the National University of Singapore, said that Asian optimism will balance out "Euro-pessimism" in the coming years.
Mahbubani noted that Asian leaders believe that now is their time. There are no major wars on the continent at this time, and the likelihood of a new major conflict is low. He also pointed to the long-term trend of increasingly less poverty in Asia.
One of the most provocative points by Mahbubani related to China. While many in the West think the Chinese are waiting to rise up and revolt, he noted that the past 30 years of economic development have been the most remarkable in all of China's history. And unlike in a lot of Western countries, the desire for a strong government is common in China and Asia in general, according to Mahbubani.
Finally, he noted that China is on track for growth of 8%-9% this year, while India should grow around 7%-8%. Asia will have a great year, Mahbubani reports, as long as Europe doesn't collapse.
Dr. Doom isn't only doom and gloom
Roubini offered one of the most fascinating insights from the panel. At one point he quoted the famous line by Keynes -- "In the long run, we are all dead" -- and then turned it on its head by saying that we need to be careful that we don't die in the short run this year.
His point was that longer-term trends look very hopeful, but we're facing huge challenges in the near term. There is tremendous growth in emerging markets, and technological developments are reaching new heights with the passage of time. For the world to benefit from these positive trends, however, we need to find the leadership to address crises like the European debt problem and the growing fiscal challenge in the United States. If we don't, according to Roubini, we may be facing a full-on catastrophe in a couple of years.
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