I have a friend, Steve Boren, who has been a broker as long as I have. We have shared our take on the markets and economics and our jobs. He is a wise man and sometimes explains things better than I can. I am going to give you some of his observations, which are exactly what I believe, and clarify for you what will make you a better investor.
“Have you ever tried shaking one of those magic eight balls found in the toy aisle? You know the gist: Ask a random but important question like, “Will the Broncos win the Super Bowl this year?” Then, get a generic answer like, “Ask again tomorrow.” And finally, in frustration, ask the same question and vigorously shake until you get the answer you’re hoping for: “Without a doubt.”
“This is similar to cracking open a fortune cookie and hoping to find meaning in the random answer to a random question. Yet 99% of the time, the cookie’s answer isn’t relevant, let alone one we believe to be true. But this idea that we can accurately peek into the future and gain crucial insight keeps us wanting more.
“Forecasting financial markets is no different. I’m not saying the media pundits on CNBC have a magic eight-ball behind their desks. But honestly, if they did, would we evaluate these “experts” any differently? “Today, we’re discussing stock XYZ. According to our analysts, this stock’s outlook is … [shakes ball behind desk] … not so good. More news at eight.” Pundits believe they can see into the future, and they convince their viewers of the same. As a result, forecasting becomes a believable art.
“Over time, I’ve learned to be on guard when hearing economic forecasts. They never seem to predict the future with any accuracy. As Canadian-American economist and diplomat Jon Kenneth Galbraith has said, “There are really two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”
“Forecasting isn’t new. Even back in biblical times, dream interpreters and fortune tellers were held in high esteem and earnestly sought. But as much as we may long for a predictable future, there’s only one thing we can count on: There are no facts about the future.”
What follows are the predictions made at the beginning of the year. None of these forecasts have come to pass, and yet we continue to get updates that are equally suspect.
- A recession is coming soon. A recession, whether traditional or newly defined, simply hasn’t happened. And “soon” is a nebulous word. Indeed, a recession will occur, given a long enough time horizon. When it does, these same forecasters will stand up and say, “See, we were right all along!” Never mind that they’ve called 14 of the last three bear markets, and eleven of those predictions never occurred. Instead, the economy today is seemingly more resilient than the consensus about it was just nine months ago.
· Corporate earnings will collapse. Not long ago, forecasters were calling for a collapse in corporate earnings. The recent data shows earnings down a bit, but far from a “collapsed” level. Also absent are any corporate defaults that were predicted.
· The US dollar will collapse. The dollar is close to its level from a year ago. No significant weakness has been found (yet). What currency do you think the world trusts? Bitcoin? The Chinese Yuan? The Euro? Amazingly, 80% of all US $100 bills, and nearly 60% of all paper US currency, exists outside the United States, according to the International Monetary Fund.
· The banking system will collapse. Recall the fear that the collapse of Silicon Valley Bank would cause a contagion, leading to the destruction of banks on par with 2008 and 2009. Yet today, most banks seem pretty stable. Those who improperly invested their reserves in long-term treasury bonds to earn a paltry interest on their capital when interest rates were near zero are struggling, but that’s due more to poor management than poor economics.
· Rising inflation will destroy consumer demand. In spite of continued increases in inflation, the consumer has remained surprisingly resilient, adapting their spending to increased costs in nearly every purchase. Inflation has moderated somewhat, but the ultimate outcome of inflation (and of the Federal Reserve tightening) remains to be seen. To date, consumers are still buying stuff — which is a good sign.
These forecasts leave two options in how to respond. First, panic and react, or second, take a deep breath and calmly remind yourself that this, too, shall pass. Like an airplane passenger experiencing turbulence, the right course of action is rarely to jump up and attempt to commandeer control from the pilot. Use discipline to withstand the inevitable yet temporary price declines. These dips may feel uncomfortable, but ultimately, they provide potential opportunities to arrive at your desired destination by acquiring great businesses at lower prices.
We look for companies with a history of dividend payments that have grown faster than inflation. Also, understand the difference between price per share and the value of a business. “Price is what you pay; value is what you get,” says Warren Buffett. Recognizing this difference and using it to your advantage takes experience, skill, and focus.
As Buffett also reminds us, “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
In the next few months, we will take advantage of the downturn and move to companies that have suffered in this downturn.
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