Truth is that MOST Investors CAN’T see the macro future better than anyone else. Thus trying to FORECAST the future WON’T make them successful investors.
There are two classes of forecasters: Those who don’t know, and those who don’t know they don’t know. Most investors act as if they can see the future. It is either they think they can, or they think they have to pretend they can. That’s dangerous if it turns out they can’t, as it is usually the case.
One of the main reasons for this is the enormous influence of randomness. Events often fail to materialize as they should. Improbable things happen all the time, and things that are likely fail to happen. Investors who made seemingly logical decisions lose money, and others profit from unforeseeable windfalls. Nothing is more common than investors who were “right for the wrong reason” and vice versa.
Investors would be wise to accept that they can’t see the macro future and restrict themselves to doing things that are within their power. These include gaining insight regarding companies, industries and securities; controlling emotion; and behaving in a contrarian and counter-cyclical manner.
While we can’t see where we’re going, we ought to have a good sense for where we are. It’s possible to enhance investment results by making tactical decisions suited to the market climate. The most important is the choice between aggressiveness and defensiveness. These decisions can be made on the basis of observations regarding current conditions; they don’t require guesswork about the future.
Superior results don’t come from buying high quality assets, but from BUYING ASSETS -REGARDLESS OF QUALITY- FOR LESS THAN THEY ARE WORTH. It’s essential to understand the difference between buying good things and buying things well. A low purchase price not only creates the potential for gain; it also limits downside risk. The bigger the discount from fair value, the greater the “margin of safety” an investment provides.
The price of a security at a given point in time reflects the consensus of investors regarding its value. The big gains arise when the consensus turns out to have underestimated reality. To be able to take advantage of such divergences, you have to think in a way that DEPARTS FROM THE CONSENSUS; YOU HAVE TO THINK DIFFERENT AND BETTER. Superior performance doesn’t come from being right, but from being more right than the consensus.
You can be right about something and perform just average if everyone else is right, too. Or you can be wrong and outperform if everyone else is more wrong.
Over the last few decades, Investors’ Time Frame have shrunk. They’ve become obsessed with quarterly returns. In fact, technology now enables them to become distracted by returns on a daily basis, and even minute-by-minute. Thus one way to gain an advantage is by IGNORING THE “NOISE” created by the manic swings of others and focusing on the things that matter in the LONG TERM.