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The Hardest Thing

June 13, 2012

Why is so much effort put into forecasting what is going to happen to the economy and, by extension, to the stock market? I’ll never get it. Every time I read some market forecast I have to remind myself that for all the thought and effort that has gone into it, it really is worth less than the paper (or screen) it’s printed on. The truely amazing thing is that I have to remind myself of this. Yes, it’s the Hardest Thing (yes, I realize the phrase is purloined from a Great Investor, but then, what great investment idea is truely unique?) to accept that WE CAN’T FORECAST WITH A CONSISTENT DEGREE OF ACCURACY. You may get this year’s call just right, but how likely are you to repeat that next year? It’s a very low probablity by the look of things. So why don’t we just do away with all talk about where the economy is going and whither the stock market? Well, for one thing it’s a lot of fun to speculate on what’s to come. But you’ve got to realize it’s just a waste of time as far as making investment decisions. You’re much better off just sticking to a Graham strategy for investing and going to a play or listening to music for entertainment.

The Hardest Thing is not participating in the ‘forecasting’ game.

The Hardest Thing is to become comfortable knowing that you will never know for sure if an investment was a good investment even after you sold it.

The Hardest Thing is not having enough feedback to adjust your investing style, ever.

The Hardest Thing is to accept the true degree of randomness in life.

So once you’ve gotten over The Hardest Thing you can just get down to investing. I’ve taken a few weeks off to work on a project unrelated to investing and find that I feel better when I ‘detach’ for a while. My portfolio is made up of positions I’d be happy to hold for a year or two without seeing a quoted price on any of the stocks. I think that’s the way it should be if you’re investing for yourself. I’m not a trader so I don’t look for short term disequilibriums. All my positions will likely take one or more years to play out; I certainly don’t have to follow the share prices daily. And watching won’t do anything to speed up or slow down the process of shrinking the gap between Mr. Market’s take on the value of a company and my own.

  1. Fully agree on the reliability of forecasting! Except from wide ranges it is hard to predict.

  2. Thanks for the comment, Gusto.

    However there is some value in the ‘science’ of forecasting for the value investor. Identifying the greatest confluence of forecast consensus, I believe, is a good indicator for potential investment opportunity; the greater the consensus in a particular forecast, the more likely there is mispricing. I’m not saying you can determine whether the consensus is correct or not (as I don’t believe anyone can) but, as in paramutual betting, betting on the favorite is not likely to generate the greatest payout; I’m looking for a small edge (of knowledge) to take a position against a consensus so I can generate outsized returns. At least that’s my goal!

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