by Alexander Green
Dear Reader,
At an investment conference last year, I sat on a panel with an analyst who told us he had a "system" that accurately predicts stocks, bonds, currencies, precious metals, oil prices, and interest rates.
All would be revealed, he promised, in his workshop that afternoon.
He was so confident - brazen really - that I figured no one in the audience was buying his schtick.
Boy was I wrong. Attendees flooded his workshop, spilling out into the hallway.
Yet, in my experience, there is an inverse relationship between the specificity of an investment forecast and the quality of its results.
If, for example, you hear someone say, "Stocks are making a bottom here," you can safely chalk it up to naivete or inexperience. If an analyst says, "My indicators show the market will trade higher a week from now," he or she may just be confused. But if you hear, "the Dow will find support at 10,320 before rebounding to 11,250 and then settling back to 10,800," run. That kind of analyst should be wearing a sandwich board that says "I Haven't the Foggiest Idea What I'm Talking About."
Physicists, chemists and engineers can make fairly accurate predictions. But in many areas - and especially in the realm of human behavior - all bets are off.
Investors hate uncertainty, of course. And history shows they will pay "experts" a great deal to remove it.
If only they could. Instead you have smart, articulate, attractive, well-paid men and women on CNBC each day talking utter nonsense. Of course, channels like these don't exist to help you reach your financial goals. They exist to attract viewers and sell advertising.
Experienced investors understand that, to a great extent, the future is unknowable. And that's ok. Investment success doesn't come from following the right predictions. It comes from following the right principles
That's why The Oxford Club recommends that you asset allocate properly, diversify broadly, stick to quality, and run trailing stops behind your individual stocks to protect your principal and your profits. This gives you unlimited upside potential with strictly limited downside risk.
You will still suffer setbacks from time to time, especially in times like these. But this is a time-tested approach - and it works.
I would love to tell you when the stock market will rally or whether the economy will double-dip. But no one can know these things with any certainty.
Sure, you can look at all sorts of indicators, traditional gauges and historical parallels. But that's not enough. As Warren Buffett said, "If past history was all there was to the game, the richest people would be librarians."
Success in the financial markets takes time and patience. You can't be in a hurry. In the investment arena, high confidence and big egos are routinely taken down like the Berlin Wall.
Humility is essential to investment success - as it is to so much else in our lives.
That doesn't mean selling yourself short or avoiding risks. It means making an honest appraisal of the limited knowledge, experience and understanding that we all bring to various situations.
It isn't possible to eliminate uncertainty. So the secret is to use an approach that capitalizes on it. Our small island of knowledge is surrounded by a vast sea of the unknown. Once we accept this as investors - and as human beings - things tend to go a lot smoother.
Carpe Diem,
Alex
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Alexander Green is the Investment Director of The Oxford Club.
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