Investing When We Don’t Know the Future
“Today is the tomorrow you worried about yesterday” –Dale Carnegie
“Making predictions is hard, especially about the future” –Yogi Berra
We humans hate uncertainty. Deep down, we want to know how things are going to turn out. We day-dream about winning the lottery, having the perfect job, enjoying the perfect vacation (with selfies to prove it), buying the perfect house, getting the perfect exam score. But, because we really can’t control the future, we also worry: will I ever meet the perfect spouse? Will the exam results be negative? Will my children live happy lives? Will there ever be world peace? Once and for all, is drinking coffee (or eating eggs) truly good for us?
Investing would be simple if only we knew the future. Imagine if you knew the future price of a company’s stock with absolute certainty. It wouldn’t take long to amass a fortune. (Of course, if everyone had that ability, those profits would disappear instantly as everyone attempted to trade on that knowledge.)
I always asked my students in my investment analysis classes to imagine the perfect investment. They would quickly compile a list of attributes:
- High and growing returns
- Ever increasing in value (with no declines or price volatility)
- No risk of default; always holds its value
- Perfect liquidity (can always sell at the going price)
- No state or Federal taxes on the income or gains
- No fees or expenses (college students seldom thought of this one, for some reason)
Of course, such an investment does not exist. But if it did, future returns would be guaranteed with zero uncertainty. Finally: A worry-free investment future!
Alas, as that old, annoying song goes, “the future’s not ours to see.” But this doesn’t stop us from trying the next best thing: predicting the future. But how good are we at it? Fast Company magazine recently published a list of some predictions from different time periods. Here are some of my favorites:
- “Louis Pasteur’s theory of germs is ridiculous fiction.” – Pierre Pachet, British surgeon and Professor of Physiology, 1872.
- “It doesn’t matter what he does, he will never amount to anything.”– Albert Einstein’s teacher to his father in 1895
- “The horse is here to stay but the automobile is only a novelty—a fad.” – The president of the Michigan Savings Bank advising Henry Ford’s lawyer, Horace Rackham, not to invest in the Ford Motor Co., 1903.
- “There is no likelihood man can ever tap the power of the atom.” – Robert Millikan, Nobel Prize in Physics, 1923.
- “Democracy will be dead by 1950.” – John Langdon-Davies, A Short History of The Future, 1936.
- “We don’t like their sound, and guitar music is on the way out.” – Decca Recording Co., rejecting The Beatles, 1962.
- “Reagan doesn’t have that presidential look.” – United Artists executive, rejecting Reagan as lead in the 1964 film The Best Man.
There is ample evidence that even well-educated and well-publicized “experts” in the fields of economics, investing and politics have long-term predictive accuracy about as good as a coin toss. So why do we hang on their every word? My guess is that we secretly believe that someone’s “expert status” gives them special insight into the future, and, when it comes to investing, that insight might lead to something close to that elusive “perfect investment.” Also, don’t forget that these so-called “gurus” are seldom, if ever, held accountable for their bad predictions.
Blindly following “expert advice” can sometimes lead investors down the wrong path, turning them into speculators and making them vulnerable to investment scams, fads and outright fraud. Thus, it is very important to know the difference between speculation and investing. Speculation involves making “bets” on the imminent rise of some exciting or exotic investment (gold, cryptocurrencies, pork-belly futures), promising very high returns in a short amount of time. But we often fail to ask basic questions about the underlying investment thesis or the probability of losing our money, for fear of missing out.
True investing, on the other hand, takes a long-term view and is solidly based on the principles of wealth creation as the fruit of capitalism, free enterprise and entrepreneurship. It recognizes that markets can be volatile in the short-term but takes the position that investors are likely to be rewarded over the long-term for putting their money at risk within a well-thought out, diversified, evidence-based investment approach. The investor’s risk capacity, risk tolerance, cash flow needs, and tax situation, should also be accounted for, all within the context of a comprehensive financial plan.
Realistic expectations about future investment returns are a good antidote to frenetically trying to find the next hot investment. I once read somewhere that we should want two boring things in our lives: our health and our wealth. A good financial plan together with a sensible investment approach can go a long way to relieving the anxiety that comes with not knowing the future.
John serves as Chief Investment Officer for Coyle Financial Counsel and is responsible for overseeing the investment process. John’s prior experience includes managing institutional fixed-income portfolios for corporations, pension funds, non-profit organizations and foundations at several large, global asset managers. With more than 20 years of institutional investment experience, he is energized by helping individuals understand the role investing plays in meeting their long-term financial goals.
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