How important should forecasting be in your relationship to your portfolio?
I hope you said, “Not very.” The need for a forecasting ability generally attaches to traders rather than to investors. Ben Graham summed it up decades ago.
“The purpose of margin of safety is to render the forecast unnecessary.”
The real story is a little deeper than that but it is worth reviewing the facts.
Margin of safety only matters when you are buying good businesses with a long term hold in mind. The future price will fluctuate and if your margin of safety is sufficient that matters not.
The investor mindset. Buy something I can keep and it will behave at least as well as the economy taken as a whole. After all I will spend my future in the future economy and I might as well have good tools to help me.
Forecasting matters when you are expecting to sell the security at some near term point and believe the price will then be higher.
The trader mindset. In this environment, you are anticipating how the market will evaluate the security. The market is made up of you and your fellow earthlings. You believe you can guess how they will behave. Maybe better how they will interpret the value of the shares in the company you have chosen.
Traders can make money in any market if they can estimate Mr. Market’s moods and preferences consistently. Few can. So the defense becomes adopting the life of an investor.
An investor is indifferent to Mr. Market, except when he is offering bargains. The idea is to buy a unit of the economy and to grow with it. Companies like John Deere, Johnson and Johnson, Proctor and Gamble, GE and probably Microsoft. If they stick to their core businesses, they are difficult competitors for the others. You could own them for a long time and achieve adequate or better results.
Traders are faced with a certain amount of randomness that investors can ignore. Trader swings are bigger and their outcomes less predictable. The range of information they must possess and be able to analyze is far greater than that facing an investor. Human psychology is a big factor and no one understands that with any certainty.
Investors have boring securities, while traders enjoy excitement. That has limits. As a policeman friend once told me, “The job is 99% boring and 1% too exciting.”
In the investment case, boredom represents predictability and predictability is an important aspect of any portfolio.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772