Wednesday, January 20, 2010

Principles trump predictions


By Dr. Jason T. White
Director of Investments
Family Investment Center

January is a popular time of year for knowledgeable finance folks to take to the airwaves and print media making prognostications about where the economy may be headed over the next 12-months and at what level the Dow or S&P 500 might end the year. The more outlandish these short-term forecasts, the more attention these traders garner for themselves and the media outlets distributing their projections.

As exciting as it may be to engage in such frivolity, basing one’s investment goals and plan on educated speculation is a fool’s game. If you want to place a bet on the foresight of these handicappers, you might have a much more enjoyable time throwing dice at the craps table on a weekend trip to Vegas or an area floating casino.

While traders may salivate over the latest tip from a screeching ex-hedge fund manager on the tube, true investors tune in to such rants more for the entertainment value of the host than for financial strategy advice.

Were any of these pros even close to presaging the market nadir last February, or the bull market run that followed and continues into the beginning of this new decade? Not even close.

Recognizing the incentive the media pros have for personal financial gain from attracting and retaining audience, I believe that most of these guys have a greater interest in maximizing their book royalties and Nielson ratings than ensuring your financial success. Trying to base a prudent family investment strategy on the minute-by-minute meanderings of the financial press is a sucker’s game. Not only will this inevitably result in the need for acid-reduction potions and the occasional antidepressant prescription, it simply does not work to try and outfox the market. I can’t. You can’t. No one can.

Professional gambler/traders may hit a hot streak from time-to-time, perhaps even lasting a few years, but the only certainty from such short-lived success is that a cold streak is bound to follow. Trading stars may temporarily soar brightly in the evening sky, but the simple law of gravity invariably drives them into meteoric craters sooner or later. Statisticians refer to this as reversion to the mean. In finance, we like to talk about efficient pricing in markets. The long-term results are the same.

So, how does one avoid the heartburn and despair of the trader’s game? Don’t play! Choose principle over prediction.

Investors, stubbornly and properly focused on the long-term, practice their craft with resolute calm and steadfast commitment. Investors recognize that markets are consistently unpredictable over short periods of time, focusing their strategy on decades rather than days, months or even years.

Investors don’t wake up in a cold sweat in the middle of the night wondering how Asian markets opened or worried about the depreciating euro. Investors are plugged in to the events of the day, but investors process economic and political developments with a forest versus trees perspective. Investors have goals and an investment plan they believe in – and they stick to it knowing that market downturn, recessions, currency fluctuations and the like are transitory events. Investors allocate their assets consistent with financial targets: retirement, college education, or income production. Investors diversify to their holdings to reduce risk. Investors are rocks in the hurricane. Investors feel fear and greed but understand that contrarian financial behavior is proven to outperform running with the herd.

Principles trump predictions – always.

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