Market Prediction: You’re Trying Too – Hard Small Lessons With Big Meanings by Morgan Housel,
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.
Concentration in hedge fund portfolios has been rising throughout the year and approached a record high during the third quarter. In fact, the only time concentration was higher was during the fourth quarter of 2018. Hedge Funds Are Highly Convicted But With Minimal Crowding According to Goldman Sachs' Hedge Fund Trend Monitor for the third Read More
“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:
- 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...
#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.
See full presentation below.