Fearless Fall Predictions?

  • Posted by
  • on September 3rd, 2010

The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.”  Stephen Hawking

Between the shaky economy and the start of football season, the world is full of predictions.  Throw in an Atlantic storm or two, and my pet peeve is really getting tested.  Two reasons I get annoyed:

1) Why does anyone think they have a clue about the future?

2) Why does anyone think they need to know about the future to make money?

I’m all for forecasting scenarios.  With infinite possibilities, we can’t plan at all…plot 5 scenarios(great, good, flat, poor, awful) and we cover the bases pretty well.  From there, we can prepare for just about any outcome.

What I am NOT for is needing to know the outcome.  I get asked time and again, “What do you think about the economy?”, “Are we going to double dip?”, “How can bond yields go any lower?”.  Add to that, “Can the Yanks pull it off again?”, “What’s Tebow gonna do?”, ” Will anyone knock off ‘Bama?” and I turn into a mime or just go with “Who knows?” or “We’ll see”.

It’s not that I don’t have an opinion on these topics, it’s just that my opinion is worthless.  Does that make me too dumb to profit?  I don’t think so, it just means that opinion plays no role in my positioning.  The only thing that matters is price.  A smart guy says CJ Spiller is 10-1 to win Offensive Rookie of the Year…I find that an interesting value.  Not because I have the faintest idea how he will do, but because if a few injuries happen the dominoes could fall into place, and 10-1 is a great value given the competition.

Who makes money in the markets?  Sometimes it’s the guy with the opinion, and he gets books written about him like John Paulson.  Good for him…I think it was more about the low risk/high reward purchase he made on those credit default swaps, but his prediction paid off.

Generally two types of investors make money over time…value investors and momentum investors.  Why?  Because they’re willing to act when most aren’t.  Their success doesn’t hinge on predicting an outcome…it hinges on someone later paying a much higher price than you pay now.  The value investor scours the balance sheet, develops a thesis on what “fair value” is, and if it’s well enough below, buys the stock and waits.  If fundamentals improve, it’s a home run instead of a double…but the payoff is not contingent on that outcome.

On the other spectrum, the momentum investor looks at rising price or explosive growth and joins in…seems silly, but since most are afraid to pay up there’s actually only a small % of participants aboard.  He’s not making a prediction, he’s making an observation…this thing is going up, and I’m going to be involved until it stops going up.  Simple, but often effective as most are too worried they missed the boat already…how many people do you know that have actually owned NFLX or CRM or BIDU for more than a week?

To me, misapplied GARP is the dangerous approach, grabbing the worst elements of value and momentum and combining them into a toxic mix of prediction and high risk.  A growth stock with slowing growth is not a growth stock…it’s a bloated enterprise with declining profit margins.  A reasonably priced stock without deep value is not a value stock…it’s a stock in no man’s land that will correct to its true value through time or price.  There is no reasonable price for a falling stock until it reaches “hate” status, at which point skilled value players pounce.

Other than “knowing” my Buffalo Bills won’t make the playoffs, I have no idea how football season will play out.  I manage my fantasy team the same way I manage markets…let value fall to me, or grab the emerging names who aren’t quite as famous as the ones we all know but might be more familiar soon.  It’s not necessary to know.  Recognizing what is happening puts you ahead of most…being willing to act on it puts you ahead of virtually all.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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