Market Prediction: You’re Trying Too – Hard Small Lessons With Big Meanings by Morgan Housel,

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Four variables predict the future value of wine.

  • Age of the vintage.
  • Average temperature during growing season.
  • Amount of rain at harvest.
  • Amount of rain in the months before harvest.

…. predicts 80% of future price variability.

John Reed:

“When you first start to study a field, it seems like you have to memorize a zillion things. You don't. What you need is to identify the core principles -- generally 3 to 12 of them -- that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles.”

#1 Compound interest is what builds wealth. And it takes time.

There are four ways to invest:

  • Unsuccessfully
  • Long term (varying degrees to success)
  • Short term, successful due to luck
  • Short-term, successful due to manipulation/fraud

That's the complete list. Numbers 3 and 4 eventually become number 1.

  • Time is the most important variable in investing, but the one we have the least respect for. Buffett: "I think slowness turns off more people than anything else.“
  • Of Warren Buffett’s $60 billion net worth, $59.7 billion came after his 50th birthday, $57 billion came after his 60th.
  • Most investors’ definition of long term is the time between now and the next bear market.
  • Real estate feels like the best investment only because people hold it for the longest time.
  • Time is your last remaining edge on Wall Street.

This is your competition, folks...

Market Prediction

Market Prediction

Market Prediction

#2 You have never been able to predict what the market will do next. This doesn't stop you from predicting what the market will do next.

  • Kenneth Arrow: “The Commanding General is well aware the forecast are no good. However, he needs them for planning purposes.”
  • Future market returns will equal the dividend yield + earnings growth +/- change in the earnings multiple (valuations).
  • Current dividend yield we know. Earnings growth we can reasonably forecast. Change in multiples is totally unknowable.
  • If someone said, "I think most people will be in a 8.67% better mood in the year 2024," we'd call them delusional. When someone does the same thing by projecting 10-year market returns, we call them analysts.

Always wrong, never in doubt.

Official forecasts for where the Dow would end in 2008:

  • William Greiner, UMB Financial: 14,400
  • Tobias Levkovich, Citigroup: 15,100
  • Bernie Schaeffer, Schaeffer’s Investment Research: 15,300
  • Leo Grohowski, BNY Mellon Wealth Management: 14,800
  • Thomas McManus, Banc of America Securities: 14,700
  • David Bianco, UBS Investment Research: 15,250

Actual close: 8,776

  • 2000: Congressional Budget Office projects the government will effectively be debt free by 2009.
  • Newsweek, 2000: Bush win could "help banks, brokers and other investment firms." By the end of second term, the KBW Bank Index had dropped 85%.
  • Newsweek, 2008: If Obama wins, sell bank stocks: regulation will kill them. KBW Bank Index up 186% since.
  • The Money Channel, 2000: Bush win: “A broad tax cut ... has the tendency to increase discretionary spending." By 2005, four of the six largest airlines were bankrupt.

Life without predictions

  • Thinking we can predict leads to overconfidence. Overconfidence leads to misery.
  • Knowing you can’t predict automatically forces you to plan for contingencies. It forces diversification.
  • Investing works best with a wide margin of error. (This is true for most things in life).
  • Graham: “The purpose of the margin of safety is to render the forecast unnecessary.”

#3 You don't respect the idea that "do nothing" are the two most powerful words in investing.

  • “The big money is not in the buying or the selling, but in the sitting.” -- Jesse Livermore
  • Anyone who bought an index fund 20 years ago and checked for first time this morning can call themselves one of the best investors in the world.
  • Sell your house in May and buy it back in October? Insane. But people do the same with stocks.
  • Doing nothing isn’t an option for pros. So advisors trade, shuffle, rotate, panic, sell in May and go away, and generally make idiots of themselves.

Try doing less.

  • Investors think dollar-cost averaging is boring without realizing that the purpose of investing isn't to minimize boredom; it's to maximize returns.
  • Effort in investing increases confidence more than ability.
  • Barber and Odean: “Investors who trade the most realize, by far, the worst performance.”
  • “All men's miseries derive from not being able to sit in a quiet room alone." - Blaise Pascal
  • The best investors in the world have more of an edge in psychology than in finance. .

#4 You fail to respect reversion to the mean.

  • Reversion to the mean is the simple idea something happens to keep both good and bad news from going on forever. Capitalism does not tolerate outliers for very long.
  • It’s the second most powerful force in investing, next to compound interest.
  • “Your margin is my opportunity.” – Jeff Bezos
  • Boom and bust cycle is a necessity of capitalism. Markets must always crash and rally, because stability is destabilizing.

Market Prediction

Market Prediction

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