This is the second of three essays about my opinions on investing for individual investors. In Part 1 I explained why I don’t try to predict the near future and why bad predictions can lead to disastrous financial result.
It’s no accident that there’s a snapshot of Fannie Mae headquarters alongside the family photographs on the memento shelf in my office. It warms my heart to think of the place. The stock has been so great they ought to retire the symbol.
-Peter Lynch, Beating the StreetI can be as wrong as the next guy.
-Peter Lynch, September 2008, when asked why he held Fannie Mae stock in his own portfolio to the bitter end.
The point of this essay: I ignore all predictions about money from ANYONE.
I don’t care if you’re Warren Buffet, the blithering idiot on TV, some random dude in my Twitter feed, or a famous hedge fund manager. You might be able to predict where a particular stock or the market is going, but I have no way of telling if you are right or wrong so it is just easier to tune you out completely.
I’ll summarize what is explained elsewhere more eloquently in books like Fooled by Randomness:
In any large pool of investors, mere chance will result in some of them greatly outperforming the average. Unfortunately we have no means to determine whether or not these results actually indicate whether someone is lucky or good, so putting faith (or money) in their ability to continue this winning performance can lead to disaster if they have just been lucky and return to statistically average results.
We’ve been lucky. Well, maybe it’s not 100% luck—maybe 95% luck.
-Bill Miller, on his streak of beating the S&P 500 for 15 consecutive years.“Countrywide’s long term business value… we think is in the $40’s compared to its current price of about $14-15.”
-Bill Miller, 2 months before Bank of America bought the company for $5.5/share.
Even if you can predict the future with some degree of reliability, I sure don’t want to take your advice on one of the occasions when you happen to be wrong.
Just as an experiment, spend a day analyzing how many times people make predictions about the future movement of stocks:
“This is going to be worse than 1929″
“They are too big to fail”
“Economists predict that….” (Put anything here. They get it wrong constantly)
“The Paulson Plan will make money for taxpayers” (You want to take the future of our country on faith?)
The constant noise of the financial media does more than cause you sleepless nights or overconfidence. Following the herd mentality will inevitably lead you to sell during panics and buy during boom periods - a recipe for lousy returns.
As I write this in October 2008, everyone around me seems to be “moving their money into something safer” until things stabilize. I even hear “pundits” providing this advice on TV. Countless studies show that this strategy is extremely risky since missing even a few good days in the market can drag your returns below inflation.
Nobody knows nothin’
-Marc Andreessen, in a speech I heard a few years ago.
Amen, Marc, amen.
I ignore predictions by me and everyone else in the world. So making investment decisions must be agonizing, right?
On the contrary, this intellectual foundation makes investing so easy that it becomes boring. I’ll discuss why in part 3.
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