We are well into the new year now, and the prediction game is reaching something of a frenzy.
By this point, I’ve read several hundred market predictions for 2020, and there is something of a consensus.
GDP growth will be around 2%, interest rates will remain low, stocks will provide single to low double-digit returns, and unless something goes horribly wrong in the economy, Donald Trump will be reelected.
There are very few people expecting a strong pick up in volatility or risk in the year ahead which makes me want to sit around with some very smart people and a bottle of bourbon to consider possible black swans that may occur in the next year to two with the potential for life-changing profits.
Now, I’ve made some money by making black swan bets on events that no one thought could happen where the math of the probability and payout calculation lined up correctly.
However, I’ve never made a nickel on a prediction in the stock market whether it was my own or someone else’s.
Making the type of precise projections that the Wall Street strategists and TV pundits make strikes me as a colossal waste of time and brainpower.
I prefer to find strategies where the numbers indicate I have a very high probability of trouncing the market, and that’s exactly what I’m going to show you today.
Let’s take a look…
Legendary hedge fund manager Ray Dalio put it best when he once suggested that one of the biggest mistakes we can make in the markets is “buying those things that have gone up thinking they’re better rather than more expensive.”
The stock market, the jewelry market, and whiskey markets are the few places in the economy where the pricier something is, the better it’s automatically assumed to be.
Even in those instances where the more expensive stock or bottle of bourbon is better, the real question should be, “Is the quality is so much better that it justifies the price I have to pay?”
When we look at a stock price, it’s just a number.
That number doesn’t mean anything until you compare that price to the value of the assets and cash flows of the company the price represents.
There is too high a price for everything, no matter how good it may be.
And with stocks trading at an average of 23.9 times earnings, this is something that every investor needs to realize if they’re looking to make money in the markets.
You can buy shares of the best companies in the world and still end up losing money as valuations drift farther away from reality.
Just ask people who bought Cisco Systems Inc. (NasdaqGS:CSCO) in 2000 or Bank of America Corp. (NYSE:BAC) in 2006.
Those stocks still haven’t recovered to 70% of their peak valuations more than ten years later, and decade into a record-setting bull market.