Have you ever tried shaking one of those magic eight balls found in the toy aisle? You know the gist: Ask a random but important question like, \u201cWill the Broncos win the Super Bowl this year?\u201d Then get a generic answer like, \u201cAsk again tomorrow.\u201d And finally in frustration, ask the same question and vigorously shake until you get the answer you\u2019re hoping for: \u201cWithout a doubt.\u201d<\/p>\n
This is similar to cracking open a fortune cookie and hoping to find meaning in the random answer to a random question. Yet 99% of the time, the cookie\u2019s answer isn\u2019t relevant let alone one we believe to be true. But this idea that we can accurately peek into the future and gain crucial insight keeps us wanting more.<\/p>\n
Forecasting financial markets is no different. I\u2019m not saying the media pundits on CNBC have a magic eight ball behind their desks. But honestly if they did, would we evaluate these \u201cexperts\u201d any differently? \u201cToday we\u2019re discussing stock XYZ. According to our analysts, this stock\u2019s outlook is — (shakes ball behind desk) — not so good. More news at eight.\u201d Pundits believe they can see into the future, and they convince their viewers of the same. As a result, forecasting becomes a believable art.<\/p>\n
Over time, I’ve learned to be on guard when hearing economic forecasts. They never seem to predict the future with any accuracy. As Canadian-American economist and diplomat John Kenneth Galbraith has said, \u201cThere are really two kinds of forecasters; those who don’t know, and those who don’t know they don’t know.\u201d<\/p>\n
Forecasting isn\u2019t new. Even back in biblical times, dream interpreters and fortune tellers were held in high esteem and earnestly sought. But as much as we may long for a predictable future, there\u2019s only one thing we can count on: There are no facts about the future.<\/p>\n
Even broad generalizations about the future tend to miss the mark. Let\u2019s look back to January 2023 and revisit some of these predictions.<\/p>\n
\u2022 A recession is coming soon. A recession, whether traditional or newly defined, simply hasn\u2019t happened. And \u201csoon\u201d is a nebulous word. Indeed, a recession will occur given a long enough time horizon. When it does, these same forecasters will stand up and say, \u201cSee, we were right all along!\u201d Never mind that they\u2019ve called 14 of the last three bear markets, and 11 of those predictions never occurred. Instead, the economy today is seemingly more resilient than the consensus about it was just nine months ago.<\/p>\n
\u2022 Corporate earnings will collapse. Not long ago, forecasters were calling for a collapse in corporate earnings. The recent data shows earnings down a bit, but far from a \u201ccollapsed\u201d level. Also absent are any corporate defaults that were predicted.<\/p>\n
\u2022 The U.S. dollar will collapse. The dollar is close to its level from a year ago. No significant weakness has been found (yet). What currency do you think the world trusts? Bitcoin? The Chinese yuan? The euro? Amazingly, 80% of all U.S. $100 bills, and nearly 60% of all paper U.S. currency, exists outside the United States, according to the International Monetary Fund.<\/p>\n
\u2022 The banking system will collapse. Recall the fear that the collapse of Silicon Valley Bank would cause a contagion, leading to the destruction of banks on par with 2008 and 2009? Yet today, most banks seem pretty stable. Those that improperly invested their reserves in long-term treasury bonds to earn a paltry interest on their capital when interest rates were near zero are struggling, but that\u2019s due more to poor management than poor economics.<\/p>\n
\u2022 Rising inflation will destroy consumer demand. In spite of continued increases in inflation, the consumer has remained surprisingly resilient, adapting their spending to increased costs in nearly every purchase. Inflation has moderated somewhat, but the ultimate outcome of inflation (and of the Federal Reserve tightening) remains to be seen. To date, consumers are still buying stuff \u2014 which is a good sign.<\/p>\n
The lesson here is simple: The end of the world has a funny way of getting postponed. Since no one can see the unseen, great investors must remain humble.<\/p>\n
These forecasts leave two options in how to respond. First, panic and react, or second, take a deep breath and calmly remind yourself that this too shall pass. Like an airplane passenger experiencing turbulence, the right course of action is rarely to jump up and attempt to commandeer control from the pilot. Use discipline to withstand the inevitable yet temporary price declines. These dips may feel uncomfortable, but ultimately they provide potential opportunities to arrive at your desired destination by acquiring great businesses at lower prices.<\/p>\n
Business | <\/p>\n
Business | <\/p>\n Business | <\/p>\n Rather than devoting your time to forecasters \u2014 or worse still, attempting to predict the future yourself \u2014 I believe a better use of time is controlling what you can control, which is your plan. We believe that a sound formula is to invest in businesses that sell to everyone, every day, and everywhere. Look for companies with a history of dividend payments that have grown faster than inflation. Also understand the difference between price per share and the value of a business. \u201cPrice is what you pay; value is what you get,\u201d says Warren Buffett. Recognizing this difference and using it to your advantage takes experience, skill and focus.<\/p>\n Forecasting should be remembered for what it is: entertainment. Like shaking a magic eight ball, it can be fun to guess future events. But no one really knows anything about the period six minutes from now, let alone six months ahead.\u00a0As Buffett also reminds us, \u201cForecasts may tell you a great deal about the forecaster; they tell you nothing about the future.\u201d<\/p>\n
\nImproving Investor Behavior: The problem with pessimism<\/span><\/p>\n<\/li>\n
\nImproving Investor Behavior: Financial and time independence – what’s your score?\u00a0<\/span><\/p>\n<\/li>\n
\nImproving Investor Behavior: Own or loan? Equities vs. bonds<\/span><\/p>\n<\/li>\n<\/ul>\n