Paul Ormerod's investment rules for success for sceptical investors

Theoretical economist Paul Ormerod says that failure is the defining characteristic of biological, social, and economic systems.
But he doesn’t think that’s a bad thing as expecting failure, and reacting flexibly is essential to success.

Paul Ormerod is the author, economist and Entrepreneur and has written 4 best selling books such as "The Death of Economics", "Butterfly Economics" and "Why Things Fail."

He is also a consultant at Voltera Partners, a creative economics consultancy who work across a wide variety of sectors. Paul is currently a visiting Professor at UCL in Risk Decision Uncertainty.

As a former advisor to the Treasury Committee of the House of Commons, he also presents frequently on macro-economic trends in the world economy.

Ormerod in his book came up with some rules for sceptical investors which can help them avoid losses and achieve investment success. Let's look at some of these rules-

Ormerod says macro-economic forecasts 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," he writes in his book "Why Things Fail".

Ormerod says 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.

Ormerod says 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," he says.

Ormerod says analysts 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," he says.

Ormerod says most people think that new CEOs improve a company’s prospects.

"It might do eventually, but companies going through major changes actually experience increased risk of failure," he says.

Ormerod says 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," he says.

Ormerod says investors need to decide for themselves about the level of risk they 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," he says.

Ormerod says diversify, diversify, diversify is the slogan.

"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," he says.

Ormerod says 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.

"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," he says.

(Disclaimer: This article is based on ''Paul Ormerod's books "The Death of Economics", "Butterfly Economics" and "Why Things Fail." )