Why It Doesn’t Matter What I Think About the Future
Should we have an opinion about the stock market, or even about the direction of the economy? Is it important to set a firm course of action based upon our expectations of what we think will occur in the coming months?
Most readers when asked, would think these questions a bit silly.
They’re a bit silly because everyone “knows” you must have an opinion to be a successful investor. Or do you?
Of course, being who I am, I would tend to think just the opposite. Did you ever think that the investors who have a firm opinion about what they believe will occur in the future are taking a risk with their flexibility? They’re messing with an essential investing skill that is the ability to change and adapt to a very fluid and dynamic situation?
Take, for example the annual Barron’s survey from a year ago about what 12 prominent strategists thought would be the course of the economy and the market for 2008. First, not a single one of them predicted a recession even though we were already in a recession at the time of the survey (December 2007). Second, their ending estimates for the S&P 500 were between 1525 and 1750. The S&P 500 closed 2008 at 903.25. That’s an embarrassingly huge miss!
Rather than throw these collective strategists into the “idiot-pile” for their lousy foresight, I’m more inclined to think them fools for even attempting it. And so publicly too! Oops.
Of course, it would be a bigger shame if they managed or advised others based upon an unflinching adherence to their predictions. That’s a portfolio-wrecking miscalculation and strategy. And this isn’t just one “strategist”… it’s all of them.
So, it’s pretty obvious that it’s a fool’s errand to try to predict the future for any reason, let alone the stock market. This is why it doesn’t matter what I think about the future. The good news is that when I’m stacked up against some of the greatest economists in the world, I figure I’ve got about the same odds as them as being right. The bad news is that those odds are somewhere between slim and none.
What to do?
I think that it is more important to imagine a number of potential scenarios and their corresponding courses of action. From this brainstorming session, you could put together a number of “if-then” statements, much like a computer program would be written. Then you can develop a written plan for the future of your investments in a sequence of decision statements. Maybe a statement would go something like, “If interest rates decrease to below 2%, I will sell my Treasury bill investments.” [This is not advice, only an example.]
As I advise clients and manage portfolios I’m always playing this little “game” with myself. I never make an investment for myself or others without an “if-then” rundown… and right now I’m playing it with the stock market.
Here’s the playbook from my mind at this moment:
- IF I see that a short term rally is developing, THEN I will invest about 50% of my clients’ growth stock capital.
- IF any of these stocks loses 10% of their value, THEN I will liquidate the position.
- IF any of these stocks gains 30%, THEN I will exit the stock and take my (our) profits.
- IF I see that the rally is coming to an end, THEN I will sell any of these new positions at the slightest weakness.
- IF I see that the short term rally has turned into a new Bull market, THEN I will commit the second 50% of my client’s growth stock capital to the market.
For the record, I’m still waiting for #1 to be True. I have some other “if-thens” that I’m playing with Treasuries, Investment Grade Bonds, our Utilities Select Strategy and the Dogs of the Dow Plus Strategy but I don’t want to annoy you with the incessant squeaking from my mental squirrel cage.
