Yoshikami: Time to Kill the Word ‘Surprise’

Some good news for a change - the U.S. ISM manufacturing index reboundedto a three-month high of 56.3 in August from 55.5 the month before. This piece of data was "unexpected" and economists were said to be "surprised" by the strong reading.

Here's my question: Why is anyone surprised about anything nowadays? With the current uncertainty in the world, the last thing that is reasonable is being surprised about any outcome.

In a market dominated by investor sentiment, surprises tend to move the roller coaster of daily trading, with emotions driving buyers and sellers and volatility being a daily reality. It is time we stop being surprised that market fluctuations are as great as they are given the level of uncertainty we face in today's global economy. Volatility is here to stay; we should stop being shocked about this permanent condition.


For investors, it is a very confusing environment as emotions are whipsawed by the movements of red and green on the screen. In the past year, media headlines were just as volatile, swinging from "recovery on the horizon" to "doom and gloom". But these are merely headlines and not realities. Investors should pause before they ride the latest mood swing or media reports promoting either view.

Australia and China just reported that their economies are not collapsing but are instead showing a resurgent growth that exceeds the views of pessimists. Off course a 10% growth rate in China is far below its recent five-year average. But should that be a surprise given the state of the global economy? And really, who are the experts that dictate whether current growth is surprising?

Frankly, whether global economic growth numbers are a surprise or not is irrelevant in the long term. What matters is how growth rates translate into global GDP and corporate earnings. Long term, emotions are irrelevant. Fundamentals are what matters.

I'm not saying to avoid assessing current sentiment. Short-term emotion-based market swings can provide opportunities for entry into positions that have sold off excessively. General Electric is an example of how a shorter-term perspective can excessively cloud one's long-term investment view. Shares of GE have been hit due to the overhang related to it's financial services unit. (Track GE Here) Still, we believe in the long-term it is well positioned to benefit from the recovery in global growth. Short-term sentiment can create opportunity.

Another current so-called surprise this week was news that Ford's sales were down 7% from August of last year.Assessing this requires a new, balanced view rather than an immediate assumption that things are going poorly at Ford . Our view is that Ford is on the right track despite a 7% drop in year-to-year sales. Ford's focus on fuel economy as well as a reduction in expenses is going to be a positive as this global automaker continues to expand its market share. So don't be surprised when current headlines a year from now are forgotten.

"Volatility is here to stay; we should stop being shocked about this permanent condition." -YCMNET Advisors, Inc, Michael Yoshikami

So what should investors do? How do you adjust your perspective to avoid the lure of emotionally reacting to headlines?

The next time you read an article and see a headline and hear the word "surprise", recognize that this is a value judgment on what expectations were; that's it. Analysts, media, investment strategists, and market watchers all have expectations and if reality exceeds or falls short of these expectations, expect a healthy flow of adjectives such as surprising, disappointing, under-performance, over-performance, and many other words to express a divergence from an expected view.

Dismiss them all and just assess what is.

Investing in the current environment requires a calm perspective and an avoidance of hysterics when analyzing information. It is helpful to take into account moods and sentiments given the impact it has on short-term portfolio strategy. However, it should not be your main gauge. Don't let emotion rule your perspective. That's a mistake many investors make and one that you should avoid.


Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com.