Preparation vs. Prediction

Photo by The CEO Kid on Unsplash

​One of the favorite pastimes for investors, both professional and individual, is to engage in prediction of the future. We spend hours debating the likelihood of inflation, the Federal Reserve’s next move or the likely GDP growth of our favorite country. It’s almost like, “If we can just imagine the right outcome for the next year, or decade, then our investing strategy will become obvious.” In my experience this is a fallacy. Not only does trying to predict the future not help, I think it can be detrimental to your investing success. It forces you, if even unconsciously, to bet on the outcome that you have envisioned. A better use of time and intellectual horsepower is to concentrate on preparation vs. predication

Don’t get me wrong, I like to talk about markets, macro analysis, and investing trends as much as the next person. It’s hard to avoid talking about, and to a degree you need to understand the environment that you are operating in. But you should avoid taking a bet on any particular outcome, because then you will potentially lead yourself to be affected by outcomes different from what you expected. A great example is our current environment: if someone had teleported from the future and told me in January, that in June we would be in the middle of a worldwide pandemic, with unemployment at depression era levels, I would never have guessed that the stock market would down only a handful of percentage points on the year! Determining what the future holds is hard - let’s continue with our current situation. The way I see it, there are two titanic forces involved in the near future: a worldwide pandemic which has spawned massive economic turmoil and unemployment, and governments (including central banks) unleashing massive support and stimulus designed to help bridge the gap in individual and businesses’ earnings shortfall. The pandemic is unprecedented in scale and the response has been equally fast and bold. Will governments be successful and bridge the shortfall in the near term? If they do, will that help or hurt stock markets? Will the pandemic continue to grow and spread? Will we get a vaccine? And how will that affect the stock market? The outcomes seem to be very wide and extreme. Trying to predict what will happen seems impossible. Unpopular as it might be, we have to honestly say: I don’t know.
 
I believe that we are better served in preparation. I’ve written in the past about alternate realities and worst-case scenarios. I think this is a good time to apply that thinking. Given our current state of affairs, I would not be surprised if we saw a 50% drop in markets in the next year. The pandemic could accelerate. We could have a contentious election. Any number of our current woes could spill into the markets. On the other hand, maybe we get a vaccine or other positive development. In that case I could see the markets being up 50%. The reasons don’t matter so much, it is the outcomes we should plan for.
 
I find it to be very stress relieving to plan against certain outcomes. For example, if the markets drop say 20%, I may plan on putting one third of my current excess cash into the market. If it drops 40%, I would put in the next third, and so on. That way I know what I plan to do and when to do it. I can move from worrying about the situation with the assurance that I have a plan in place to deal with the eventuality. Your plans don't need to be complex, in fact, I find simpler plans more effective. These types of plans don’t have to be strictly about investing either. I know several people who have been getting additional job training with the thought that it will make them more valuable to their employers and less likely to be laid off, or it could lay the groundwork to switch jobs if necessary or start your own business. As usual, these plans are personal and based on your own situation and values.
 
If we take this preparation far enough, we could even plan to prosper. Are you interested in a second home or rental property? Start doing some research on areas you might like to buy. Run your numbers and be prepared to act if prices drop to value levels where you would be interested. Thinking about renovating your house? Look for some contractors that you like. If business drops off in a recession, then maybe you could get a deal on your dream project.
 
I think this quote captures the idea well:

“In the fields of observation chance favours only the prepared mind” – Louis Pasteur.

So instead of predicting, plan. And if opportunity presents itself, prosper.