Reviewed & Updated On: 25 May 2024
Are you drawn to my article title? Or ever get sucked in by headlines screaming about the market's next big move?
You're not alone.
But here's the sobering truth: the market is a chaotic beast, and predicting its every twitch with certainty is next to impossible.
Think of it this way: imagine trying to predict the weather on a butterfly's wings. That's the kind of complexity we're dealing with.
Financial guru Howard Marks, co-founder of Oaktree Capital Management, echoes this sentiment in the book "Richer, Wiser, Happier." In a chapter titled "Know What You Don't Know," Marks shares a gem from economist John Kenneth Galbraith: "There are two classes of forecasters: those who don't know, and those who don't know they don't know."
Instead of admitting the inherent unknowability of the market, analysts often churn out quarterly earnings estimates down to the last cent, creating an illusion of control. It's like watching a magician pull a rabbit out of a hat – impressive, sure, but ultimately a trick.
Psychologist Amos Tversky, known for his work on cognitive biases, once said, "It's frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what's going on."
Here's the kicker: even a broken clock is right twice a day. Forecasters do occasionally hit the nail on the head, but as Marks points out, these wins are more akin to a blind squirrel stumbling upon an acorn.
So, Marks throws in the towel on forecasting the future – inflation, interest rates, you name it. In his view, the future is influenced by a million and one factors, many of them random and unpredictable. Who could have predicted the war in Ukraine when this article was written? Exactly. This very unpredictability is why Marks also rejects the idea of "timing the market" – trying to guess when to jump in and out based on short-term predictions.
The investment world is full of folks who claim, or at least act like, they have a crystal ball. As an investor, it's crucial to remember this: we can't trust these predictions blindly. The number of unknowns is simply too vast.
So, what should investors do?
Diversification. Spreading your investments across different asset classes is your best defence against the market's unpredictable nature. Think of it as building a financial fortress with multiple walls – even if one gets breached, the others hold strong.
Investing in tranches, or chunks over time, is another powerful strategy. This smooths out market fluctuations and protects you from buying at the absolute peak.
Finally, having a "margin of safety" – meaning you only invest in assets with intrinsic value well above their current price – gives you a buffer against potential downturns.
Remember, the market is a journey, not a destination. Don't get caught up in the hype of forecasts. Focus on building a solid, diversified portfolio that can weather any storm, and you'll be well on your way to achieving your financial goals.
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