100 Ways to Beat the Market #12: Swear Off Market Forecasts

When John Griffin started Blue Ridge Capital in 1996, it was a very difficult period because he did not have a long-term track record, and everyone was fixated on his short-term record, i.e. what he had done in the prior week, month, year, etc.

When Griffin started, he had a large amount of cash to deploy.  It was very stressful to go from the comfort of holding cash to putting it at risk.  At the time, he wrote on the board in his office, “The future is uncertain; it is always a difficult time to invest.”  He constantly reminds himself and his staff of this.

Today the markets feel particularly uncertain. Hardly a day passes when I don’t see an article about retail equity investors dumping their stocks because they can’t bear the high level of volatility. They often claim that they’ll return to the equity markets when things calm down and prospects become clearer.

The problem with this is that the future is never clear. There may be times when people think the future is clear – typically good times or in the latter stages of a bull market – but this is generally self-delusion based on over confidence. Yet, most people continue to be lured by the siren song of market forecasters, and opportunists are happy to oblige as evidenced by cable financial networks ever readiness to put on an endless stream of market prognosticators.

So, what’s the answer? After all, investing inherently involves making judgments about the future. One rational answer lies in focusing on individual companies where you can occasionally – if you work hard enough at it – gain a powerful insight into one of their future prospects that can fuel the level of commitment and certainty necessary to invest a meaningful amount of your capital.

Great companies with important economic advantages have provided satisfactory returns – or better – in spite of the many vicissitudes the markets have faced over the past century. When you find such a company and Mr. Market makes it available at a good price, you commit a costly sin of omission if you sit on your hands because of an uncertain macro environment, provided – again – that you really know what you’re doing. Worse yet would be to sell such a great holding after a sharp decline in its quotational value because you couldn’t stomach the volatility.

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