Crystal Ball or 8-Ball?

“Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.”   The wise words of Lao Tzu, a 6th Century BC Chinese Poet; proven correct once again in 2014.

AHHH, it’s a new year! A time to renew, refresh and kick into gear! It’s also when the crystal ball gets worked over and out come the predictions.   Maybe this year I’ll finally get it right muses the person feverishly writing what is supposed to take place in the next 12 months.

Your humble blogger says, “HOOEY!” If a person pens a prediction that happens to be even close to the mark, it’s 99% luck because history has proven the folly of this pursuit.   Take for example last year. The economists predicted higher interest rates on the 10 year T-note, closing the year around 3.5%. OOPPSS!! It was around 2.2% at year end, and is lower now.

Oil was supposed to end around $100 a barrel and some had it much higher. NO ONE pegged the price to fall to the $50 level and lower. EBOLA was going to end the market rise in the fall of 2014. Didn’t happen!  Active managers (the stock pickers) got clobbered and had their worst performance in decades as did the Hedge Funds.

In spite of the poor performance of the 2014 predictions, the 2015 forecasts for markets and the economy are everywhere.   In case you’ve missed them, they are wildly bullish based on “historical” patterns. The least bullish statement about market performance for the next few years is that it could be sub-par the previous 5 years but will still be positive. The predictions only get more bullish from there with the presidential cycle added in; along with overseas problems that make the US market the “only game in town”.

WHY do investors or even those who don’t invest, put so much faith in predictions when the vast majority are wrong? Why are people willing to put their financial future at risk based on a rosy prediction? It’s nothing more complicated than “human nature”. We need to get a little deeper into the weeds or “break it down” as the saying goes:

  1. Making predictions is selling and all successful selling is done with a high degree of confidence. People are naturally drawn to confidence. It’s optimistic, reassuring, and passionate, which is infectious. Consider the sales person who is not passionate. NO SALE!!
  2. Human nature clamors for reassurance. They put accuracy aside in favor of confidence.   Recall the Wall St. saying, “Lie to me if necessary. Just don’t say you don’t know!”  Economist K. Arrow of Stanford said, “People are drawn to predictions because admitting the future is unknowable is just too frightening.”

At this point you might be asking…. what should an investor do to avoid the traps of predictions, slick sales presentations, etc.???

  1. Learn from others mistakes. You don’t have to make them yourself to learn.
  2. Accept the fact that chaos is inevitable and the only and BEST way to survive volatility is to stick to your discipline.
  3. Don’t try to outsmart the rules or the markets. It can’t be done on a consistent basis.
  4. Keep a diary or notes so you can look back at what you did right & where mistakes were made. This is a business of mistakes and those who survive learn from them. You WILL make mistakes. Learn and move on.
  5. Learn how to SELL when you get a signal. It is the most difficult part of investing and where most fail.

If you follow the above, I can predict that you will have more success than failure, become more independent, more secure and enjoy more choices.  Make your number MORE!!

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