“I'm fascinated with the problem of why really smart people have such a hard time predicting the future. It is mostly because the future is more random than we think. But it's also because future performance (like earnings and economic growth) doesn't tell you half of what you need to know to predict future outcomes.”
The above was taken from a recent and insightful article entitled Performance Vs Outcomes (Morgan Housel, The Motley Fool). The author described and provides examples in the world of investing that successfully picking what will do well requires not only predicting what may happen in the future, but also out predicting what everyone else’s expectation of what the future will be as well.
In other words, to be successful with investing, it’s not only necessary to predict what may happen in the future, but also to evaluate whether the rest of the market is already pricing in that same expectation, or not. For instance, we’ve long known that soda consumption is on the decline (for 12 years now), but Coca-Cola stock is at an all-time high, even as optimism about the growth potential of Walmart has proven true with net income tripling since 2000… but its stock is down 1.5% since then. Similarly, Apple fans for years have been “right” about the company as its earned almost a quarter of a trillion dollars in profit since 2012… but its stock has barely budged, even as Amazon’s profits have rounded down to zero since 2012 but its stock has tripled as the markets just see more and more opportunity for the company going forward (even if it’s not profiting yet).
What this reveals is that the further complication for investment outcomes is that in the future, stocks are then priced based on what future expectations are at that time – the future-future expectations! – which means it’s not only necessary to evaluate the future (which may be feasible for some who analyze the trends), and expectations about the future, but what expectations about the future-future will be in the future. This has proven to be almost impossible (as noted in the examples above of Apple vs Amazon and Coca-Cola vs Walmart), and similarly who could possibly know what the mood of 7 billion investors will be in April of 2021, even though that may overwhelmingly determine where market levels will be by then.
Ultimately, then, the reality is that when we try to go from just predicting trends of the future, to making investment decisions on that basis, we increasingly must recognize that we’re not just trying to predict the future, but are trying to predict future-future emotions and expectations, which is the real determinant of the outcome.
On the other hand, perhaps this helps us realize that trying to predict the future or future of future expectations is largely a waste of time.
To Your Prosperity,
Kevin Kroskey