Investing with hindsight
from The Economist, 12-18Feb00


Henry Hindsight - Finance and Economics

REMEMBER Felicity Foresight? In our Christmas issue (December 18th) we told the tale of how this little known—but brilliant—lady had used her clever investment strategy to become the world’s richest person. Her secret? Perfect foresight.

Starting with $1 on January 1st 1900, she would predict at the beginning of each year the asset, in any established market in the world, that would experience the highest total dollar return (income plus capital gain) over the following 12 months. She would then put all her wealth in that asset and not touch it for a year. By her 100th year Ms Foresight had turned her initial $1 into $9.6 quintillion (ie, $96 followed by 17 noughts). Even after deducting taxes and dealing costs, she would still be worth $1.3 quadrillion (a mere 14 noughts)—making her 15,000 times richer than Bill Gates.

However, many readers have been asking us the same question: how much would Miss Foresight now be worth if she had instead invested each January in the previous year’s best-performing asset? Meet Henry Hindsight, an old flame of Felicity’s giddy youth.

Unlike Felicity, with her annoying trait of infallibility, Henry is more like the typical investor, who tends to follow fashion. He buys shares in Asia, say, for the very reason that they have recently risen sharply. Thus whereas Felicity invested in Poland in 1993, enjoying a 754% gain, Henry piled in the next year, only to suffer a 55% decline. All too often, last year’s high flier turned out to be this year’s tunnel-dweller. During the past 50 years, he suffered a loss, on average, every other year.

These were offset by one or two spectacular gains, but over the 100 years as a whole, his initial $1 stake grew to only $783. Deducting dealing costs, this falls to $290. No wonder Felicity refused to marry poor Henry. One of the best of all her predictions was that the marriage would never work. Henry was last seen investing his little sum in Internet shares.


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