Successful investing is all about predicting the future. Buying shares of companies which will have strong earnings growth. Avoiding those which will get mired down in product recalls, management missteps, or weak demand for their products. But how can you know in advance which is which?
It isn’t easy. As I wrote in Money Grab,
Picking good stocks is tough. We try to convince ourselves that we know what we’re doing. That we can look at a whole universe of stocks and pick the winners. But it’s like trying to predict the exact path of those hurricanes that barrel up the East Coast each year. You hold your breath, hoping your beach house will be the one still standing after the winds die down and the flood waters recede. But sometimes it’s the house next door that survives. All that’s left of yours is some crooked pilings poking out from the sand.
A recent Wall St Journal article (S&P 500 Powers to New Heights, 11/25/2017) proved that even professional forecasters can have cloudy crystal balls. A survey of 17 major investments firms reported that in January 2017, all of them were predicting that the S&P 500 index would close between 2300 and 2450 at year-end 2017. In October 2017, with only two months remaining in the year, they widened their forecasts to a range of 2280 to 2650. Five firms are now predicting a year-end close of 2600 or higher.
Where will the S&P 500 actually close at December 31, 2017? No one knows. All we can say for sure is that on November 24, 2017, the S&P 500 closed at 2602.42. And at year end, a lot of those professional forecasters will be wrong.
What does this mean for you? Picking good stocks is tough. Picking outperforming sectors is tough. Predicting the future is tough.
So how can you be a successful investor? Don’t focus on trying to always pick the winners. No one can. Instead, have a well-diversified portfolio — a mix of stocks, bonds, real estate, commodities and cash — so that something you own is always outperforming, no matter what the future brings.
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