Predicting the Future

It’s tough to make predictions, especially about the future. Yogi Berra.

I make predictions for a living. Here, in the newsletter, but also in trading. If I were bad at making predictions, I would be out of a job. Not with the newsletter but the trading. Sorry to say, but newsletter people can go on making wrong predictions for a long time with few consequences, although if you’re wrong enough, you do get a reputation as the guy who is wrong all the time (like Jim Cramer). Although Cramer still has a job, but you could make the argument that Cramer’s value to CNBC is not related to his ability to make predictions. The funny thing about Cramer is that he won’t stop making predictions, and he has opinions about everything. You don’t have to have opinions about everything!

Some people think it’s impossible to predict the future. As a counterpoint, there are some people who are very good at predicting the future. There are some people who are very good at predicting the future in politics. There are some people who are very good at predicting the future in technology. And there are some people who are very good at predicting the future in markets.

I am not all that bad about predicting the future in politics. My early call is that a Republican will be president in 2028. You can save this in a folder somewhere and see how it turns out. I am terrible about predicting the future in technology—like, the absolute worst. I don’t even try. I am not bad about predicting the future when it comes to sports. When the Charlotte Hornets had a losing record at the start of the season, I predicted they’d make it back to .500; they did and made the play-in game for the playoffs.

Predicting Long Term and Trading Short Term

But occasionally the Magic 8 Ball doesn’t work. I did not predict the 15-odd percent rip in the stock market. I am somewhat consoled by the fact that practically nobody did, but that still took me by surprise. One thing people get in trouble with in markets is when they predict long term and trade short term. 

I will give you an example. I owned Philip Morris (PM) stock a couple years ago, on the Swedish Match acquisition, because ZYN was growing at a pace of 100% a year. A classic Peter Lynch pick. I figured I would hold the stock for 10 years. It ripped and then entered a period of weakness, and I sold it—far too early. I thought long term and traded short term. People do this all the time. If you have a long-term prediction on something, like a stock, then you should do your best to stick with that prediction. I mean, that’s what Warren Buffett did.

I find that it is generally easier to predict what small-cap stocks are going to do than trying to predict what an index will do, or interest rates, or currencies. Without getting into too much detail, stock indexes and interest rates and currency markets are very efficient, and unless you have an airtight macro thesis, you probably don’t have any edge above and beyond what everyone else has. And you do not want to be in a position where you have no edge.

As I mentioned last week, my friend Adam Crawford has a small-cap stocks newsletter, and he is pretty good at predicting the future when it comes to small caps. He has only been in business since last summer, and he already has had some outstanding trades, including a recent 37.8% return on… drumroll… a trucking company. I recommend you check out Heartland Investor here.

What Would Surprise People the Most?

Instead of thinking about what will happen in the future, I try to think about what might happen in the future by first thinking about what sorts of things will surprise people the most. What would surprise people the most?

In politics, I think people would be surprised if Republicans outperformed in the midterms, given the direction polls are going. In technology, I think people would be surprised if the data center infrastructure buildout for AI was actually needed, and that there was more demand than anticipated. And in markets, I think what would surprise people the most is if the stock market did a complete 180 and took a dirtnap right after making new highs. I think people would perpetually be surprised if interest rates went down. I think people would be surprised if oil went down. And so on. 

If, as an investor, you spend your free time thinking about the sorts of things that would surprise people the most, that is a pretty good jumping-off point for building a portfolio. The late Byron Wien used to do that at the end of every year.

Of course, if you are not good at predicting the future (like most people), then it is probably best to stick to an index fund, or perhaps an actively managed vehicle run by someone who is better at predicting the future. That’s the unstated premise of the index fund craze—56% of people have decided to give up predicting things and just opt for the average return. My guess is that none of them are predicting that the market will go down.

Jared Dillian, MFA