Paul Ormerod is a founding director of Volterra Consulting which calls on the skills of economists, mathematicians, physicists and statisticians to find innovative solutions to a wide range of business issues.
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Be sceptical of macro-economic forecasts.
They only seem to work when everything is quiet. Forecasters have a very bad track record in predicting genuine booms and slumps. They sometimes fail to forecast a recession even when it has actually started.
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Be sceptical of anyone who claims to predict interest rates or exchange rates.
One of the most well established facts about markets is that these cannot be forecast over time with any useful degree of accuracy - if they could, we'd all be millionaires.
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Be sceptical of arguments that just because an interest rate/exchange rate is high, it is more likely to fall than to rise.
At some point, the Euro will certainly rise against the dollar, but people have been predicting a rise ever since it fell after its launch in Jan 1999. At any point in time, a rise is as likely as a fall, no matter what the level is.
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Be sceptical of track records.
There are so many funds and forecasts that at any point in time, someone has to have done well/been right. With enough monkeys in the room, one of them will type out Hamlet. But it doesn't mean the same monkey will then go on to write Macbeth.
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Be sceptical of analysts' reports on companies.
They usually know no more than a well informed reader of the quality business press. Monitor the press with a bit more care for a while, and see for yourself how many times analysts predict profit warnings in advance, and how many times they simply re-write the company's press release.
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Be sceptical of dynamic, new CEOs modernising and transforming the core elements of a business.
Most people think that this improves a company's prospects. It might do eventually, but companies going through major changes actually experience increased risk of failure.
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Be sceptical of arguments that sheer size reduces a company's vulnerability to new competition.
The tendency to believe that the powerful will always be powerful is very deep seated. The Soviet Union looked invulnerable, but disintegrated in the space of a few years . The same applies to companies. IBM looked to have a lock on computer markets, but almost went under. Even in much more staid markets such as retailing , successful companies can implode quickly.
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Investment is about risk management not prediction.
Here's a prediction: if anyone really can make consistently successful forecasts, he or she a) won't be reading this book and b) will have retired in complete luxury. For the rest of us, we need to decide for ourselves about the level of risk we are willing to accept. It's nice to be able to boast about the quick profit you have just made on a stock. But serious investment is much more mundane. It's about managing risk.
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Diversify, but make sure you really are diversified.
Diversify, diversify, diversify is the slogan . But be sure you really are diversifying. It's how the companies or bonds perform that matters, not their name , or the location of the issuer. Holding GE and American Express might look like a diversification play, but it probably isn't, and not just because they are both in the USA.
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Track what the trackers track.
Tracker funds are often a good way to invest in a low cost way, but the diversification you get is only as good as the index they track. And several of the indexes are dominated by assets which often move in step with each other, so the real diversification you get is much less than you might think. The NASDAQ in recent years for example has been dominated by the movement of 'technology' stocks, and many of its members have moved up and down in step with each other.