At the beginning of each year, there are many pundits, experts, self-proclaimed gurus, and other characters who’d like to sell you stuff predicting the directions of the Stock Markets.
As I personally have ample years of experience in the Stock Markets (and know for sure what’s going on), I did get asked—by my two friends and my one wife—about my take on 2015.
So after thorough research, I am absolutely confident about the high probability of my forecast. Here it is:
In the next 12 months, the US-stocks will go up and they will go down. As will the stocks in Europe and in the Emerging Markets. And in each trading day, there will be movements—in either direction.
Wait, don’t go away. Hear me out first.
Ok, I might have oversold my advice a tiny weensy bit, nevertheless, I assure you that it is not to trick you, but to show you how it really is.
1) Several studies have shown that people prefer a Pundit who is confident—to one who is accurate. And Pundits are happy to oblige.
2) Confidence in a forecast rises with the amount of information that goes into it. Nonetheless, the accuracy of the forecast stays the same.
3) Investors want to believe in someone – believe me. Forecasters want to earn a living. So one of those groups is going to be disappointed. And I think you know which group that would be.
4) Pundits are people who profess to have knowledge about things that can’t be known and they have a combination of the skill of actors, the nonsensicality of comedians, the believability of priests, and the credibility of politicians.
As Nassim Taleb puts it in his unique and witty style:
“The tragedy is that much of what you think is random is in your control and, what’s worse, the opposite.”
Regular saving is in your control. Expectations are in your control. Behavior is in your control. But Stock Market moves are not.
So do not stop with your regular investments in the stock market due to “scary” predictions. Timing the market does not work, only time in the market works. Let the little dwarfs from the tribe “Compound Interest” work for you—24/7—and let them breed like rabbits.
And please do not make the mistake and follow some expert’s advice and then pretend you know something you don’t—because your perception of risk would become warped. You would take risks you didn’t think existed and would face events you didn’t think could occur.
Understanding what you don’t know, and what you can’t know, is much more important than the stuff you actually know.
“But, but,”—I hear you think—“What distinguishes us as human beings from other animals is our ability to predict the future. What happened to that scientific truth, man?”
Well, it is rather our interest in predicting the future than our ability to predict the future.
We spend a great deal of our waking life, imagining what it would be like to be this way, or that way, or to do this, or that. We do this for good reasons: it is what allows us to shape our life. And it is by trying to exert some control over our futures that we attempt to be happy. But, by any objective measure, we are really bad at this predictive function.
We’re far too accepting of the conclusions of our imaginations; nevertheless, our imaginations aren’t particularly imaginative. They have the tendency to fill in, and then leave without telling us. Our imaginations are also really bad at telling us how we will think, when the future finally comes. And our personal experiences aren’t nearly as good at correcting these errors as we might think.
Just as we err in remembering the past, so we err in imagining the future. Our desire to control is so powerful and the feeling of being in control—so rewarding—that people often act as though they can control the uncontrollable, despite being ill-equipped to properly preview the future, let alone control it.
Nobody can predict the Stock Markets. Not even me (what a mind-boggling revelation!). I actually have no idea.
I, however, have gotten accustomed to being uncomfortable, not knowing what’s going to happen next, while keeping my long-term goals in focus. Why are returns for a one year period so important anyway? That is just the time it takes the Earth to go around the sun and I don’t see it having any other significance for my investments.
Hence, let’s keep it with Napoleon Bonaparte’s definition of a military genius:
“The man who can do the average thing when all those around him are going crazy.”
It’s the same in investing. You don’t have to be a genius to do well in investing. You just have to not go crazy when everyone else does.
And be careful with your buddies, the brain and the eyes. The brain and the eyes may have a contractual relationship in which the brain agrees to believe what the eyes see, but, in return, the eyes agree to look for what the brain wants.
Too abstract ?
This analogy might help: “A clever investor likens the market to an excitable dog—on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle— through Central Park—to the Metropolitan Museum and at any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he’s heading northeast at an average speed of five km per hour.
What is astonishing is that almost all of the market players, big and small, seem to have their eyes on the dog, and not the owner.”
What are your eyes looking at?