It’s the season at last.
We put away the tools and fixings of Thanksgiving and its onslaught of people and food. Black Friday and Cyber Monday, which you are lucky if you were able to avoid, are now also behind us. Next up are the Christmas decorations and festivities.
But this also marks the beginning of another season that is much less fun.
Perhaps like me, you also received your first business magazine with bold predictions about 2019 this past weekend. This is just the first of many such publications and broadcasts we will have to endure for the next 8 weeks. Prediction season starts at Thanksgiving and runs through the final edition of Barron’s Market Roundtable in early February, so it’s a long battle.
There will be talk about the cannabis revolution, the rise of the artificial intelligence, the opportunities in cryptocurrency, the increase in driverless electric cars, the emerging dominance of wind and solar power, promise of big data, and all the glitz and glam of wearable technology, as well as a host of other hot trend predictions.
That’s why today I want to give you my best advice, so that you can more easily navigate these dangerously alluring times.
Skip the Predictions Game, and Follow This Real Investing Advice
Throughout prediction season, we will be bombarded with predictions for market behavior, results, and returns in 2019. They will be delivered with a great deal of enthusiasm and confidence by well dressed, well-spoken, and seemingly well-adjusted individuals. There will be facts, figures, graphs, bar charts, and a few pie charts thrown in for good measure. They will be very convincing, and it will be tempting to take their advice about how to position ourselves for 2019.
Please strengthen your resolve and resist the temptation to take the plunge with your money. No matter how pretty the presentation or forceful the forecaster appears, we must remember that it’s just a guess and it’s probably wrong.
The Prediction Game is not investment advice. It’s a brilliant marketing strategy.
If you are wrong, you are in the majority and no one cares. You can write it off as being influenced by unforeseen developments and begin preparing for the 2020 guesses and presentations.
If you are something even close to right, fame and fortune await. You will quickly become the Wall Street flavor of the day, and you will be showered with cash to manage for a reasonable fee. I have seen this countless times in my career when a lucky guess created another celebrity investor who proceeded to underperform an index fund for the next few decades.
Some of the predictions we hear will be spot on about what is going on – we will indeed see a cannabis revolution, and big data is the cutting edge of the future for instance – but that doesn’t necessarily mean investing in companies at any price will work out well.
If you had predicted in 1999 that the internet would continue to grow and that Cisco (CSCO) would continue to dominate the router and networking markets, you would have been spot on correct. If you had then followed up on this by investing in shares of Cisco, you would still have a 50% loss almost twenty years later.
Avoid Catastrophic Downturns by Playing These Safer Trends
In the Heatseekers portfolio, we still focus on big trends. While we avoid investing outright in hot trends like cannabis, AI, and big data, we don’t avoid trends altogether. By focusing on more general trends like the growth of government and infrastructure spending, we are rewarded in a big way.
That’s because the price we pay to own a company matters. We wait until we can invest in a businesses on very favorable terms with a huge margin of safety cooked into the financial statements.
If we are right about these general trends, we will see gains of many times what we paid for our stake in the companies. If we are wrong, we should still make some money because we bought a decent business at a great price.
What we want to avoid is being completely wrong because that’s how the really big money is lost. The most prevalent prediction for 2018 was that bitcoin would go to hundreds of thousands of dollars in value. Anyone who followed that advice has sustained the type of losses that sound like country music lyrics about the wife leaving, the dog running off, and the truck being repossessed.
Or how about everyone who listened to Ben Stein back in 2007 when he suggested bank stocks, telling us the following:
“The financials, as I keep saying, are just super-bargains. Like Merrill Lynch … a couple days ago it was trading at seven times earnings. Financials typically trade at a low P/E, but this is a joke. This stock, they might as well be putting it in cereal boxes and giving it away. That’s how cheap it is.”
To say this advice didn’t work out well is a massive understatement. History is full of such examples of failed predictions leading to financial disaster. Playing the Prediction Game is pretty much impossible. No one can predict what the financial markets are going to do in the future.
If you want to make huge money, the kind of money that allows you to tell your boss to do anatomically impossible things, and then retire and move to the beach; the type of money that will enable you to write a check for your kids to go to Harvard, Stanford, or maybe even Julliard; the kind of money that makes it possible to give your wife the second honeymoon you couldn’t do the first time around; or whatever else you can think of to do with money, then you need to stop trying to predict what the markets might do and learn to react to what it actually does.
If the markets go into free fall and we can buy good companies at great prices, then we should buy stocks. If the markets stage a massive rally and we can sell businesses for far more than they are worth then we should sell our shares. Buy Low, Sell High. Sounds easy doesn’t? However, in truth as Buffett (Jimmy, not Warren) once said: “It’s so simple like the jitterbug it plumb evaded me.”
Reacting instead of predicting swims against the tide of human behavior. Those who learn to practice it as a matter of habit will make far more money than those swimming in the pack will ever be able to even imagine.