09 Apr Market Guessing
While Warren Buffett’s annual letters to the shareholders of Berkshire Hathaway gain immense media attention and have become “must read” content for all investors, lesser known are Buffett’s earliest letters to the partners of his investment partnership (equivalent to a modern-day equity hedge fund).
In his 1966 partnership letter dated July 12, 1966, Buffett poignantly articulated his views on attempts to predict future movements of the stock market in the excerpt below:
I resurrect this “market-guessing” section only because after the Dow declined from 995 at the peak of February to about 865 in May, I received a few calls from partners suggesting that they thought stocks were going a lot lower. This always raises two questions in my mind: (1) if they knew in February that the Dow was going to 865 in May, why didn’t they let me in on it then and (2) if they didn’t know what was going to happen during the ensuing three months back in February, how do they know in May? There is also a voice or two after any hundred point or so decline suggesting we sell and wait until the future is clearer. Let me again suggest two points: (1) the future has never been clear to me (give us a call when the next few months are obvious to you-, or, for that matter the next few hours); and, (2) no one ever seems to call after the market has gone up one hundred points to focus my attention on how unclear everything is, even though the view back in February doesn’t look so clear in retrospect.
This passage, while more than 50 years old, may just as easily have been written yesterday. I share this today because many readers in recent days have likely flipped the channel to the financial news or browsed any financial publication and been inundated with forecasts about the future direction of the stock market in the coming days, weeks or months. Some may have even received detailed, well-reasoned and highly articulate “buy side” or “sell side” research confidently prophesizing how things will unfold in the future.
It’s entirely natural to take in one of these particularly compelling forecasts and feel the urge to take action—or even to simply question whether you’re doing something wrong or somehow missing out by not taking action. Prior to doing so, however, I encourage you to: (1) re-read the passage above from Buffett and replace the word “partners” on the third line with “analysts, pundits, commentators, etc.” and (2) ask yourself the following questions:
- Have I checked the track record of the specific forecaster or the track record of economic and market forecasts in general? After acknowledging that as a general rule, the track record is poor, a natural follow up question would be: what makes this forecast so special?
- Do I have any evidence that the specific forecast in question hasn’t already been priced into the market? Remember, when forecasting economic developments, it’s not enough just to correctly predict how future events will unfold if such developments are widely anticipated by investors and therefore already embedded in the prices of securities.
- Do I really want to make changes to my long-term investment portfolio based on this forecast in spite of the overwhelming historical evidence that suggests that market timing is a losing proposition that is more likely to be wealth-destroying activity than a wealth-generating one over the long term?
If after doing all of this, you still feel determined to take action, by all means, action may be warranted. My last piece of advice would be to ensure that magnitude of the action you take aligns with your level of conviction in the forecast. Mismatches here will surely lead to problems down the road if events move against you even for short period.
On the other hand, if after doing all of this and you’re still not sure, ask yourself whether you believe that over long investment horizons holding ownership stakes in a diversified set of global companies and lending to money to these same companies as well as governments around the world will be a financially rewarding endeavor? The historical data demonstrates that it has been in the past despite the periodic episodes of disappointing performance. If you believe, as I do, that it will be in the future as well, then perhaps following the timeless wisdom of Jack Bogle is the best course of action: “While the interests of the business are served by the aphorism ‘Don’t just stand there. Do something!’ the interests of investors are served by an approach that is its diametrical opposite: ‘Don’t do something. Just stand there!’”
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