Thursday, December 14, 2017

To Hell with forecasting 2018!


What will happen in 2018?  How should I know?  Do you think I am a fortune teller or… a stock market guru? 
It is not about what 2018 brings us. Yes, I would love to see $60 - $70 oil; I’d love Uranium prices shoot through the roof and have Gold hit $1350. Maybe it will happen; then maybe not! Investing is not about forecasting the future correctly.  Most of us are not very good at seeing through a crystal ball. What investing is really about is owning assets that will make money for us; hopefully for years to come. But heck, of the companies that made up the Dow one hundred years ago, only 4 or so are left, including General Electric who didn’t have exactly a blockbuster year.
It is not about picking the right technology or bitcoin thingy. It is about a portfolio, like a hand of cards, that hopefully lets you win the game. It is much easier to win when you only have Aces and Kings rather than if you have ones and twos.

The same with investments, you have to invest in what makes money, i.e.  own only good quality companies. Sometimes the investment works not out; but as long as you are getting 60% or so right you have a low risk but profitable portfolio. 
40%
returns
-10%
60%
returns
15%
Total return:
5.00%
40%
returns
-20%
60%
returns
30%
Total return:
10.00%
40%
returns
-30%
60%
returns
15%
Total return:
-3.00%

See, if you cut your losses and are wrong 40% of the time you’re still making money.  But if your loss is 20% or more, then you have to make higher returns and take greater risks to break even. You think it is more likely to make 15% return on a stock than it is to make 30%?  I would say, “duuh yes!”  Do yourself a favor and sell out your losers quickly and let your winners run!  If you cut out a stock at 10% down and hold on to your winners the chance that you’re making 15% on your winning stocks is high; probably some of your stocks may even make 30% in some years. What would your total return be? Yes, close to 14% and if you kept that up for 70/14 = 5 years you’d double your money!  
We have had a bull market in the U.S. since 2009; that is nearly 9 years!  The S&P and Dow have tripled from the lows!  Doubling in 5 years is not that difficult. You could do it with a market index ETF. The real art is to have low risk good companies in your portfolio that you bought at a reasonable price – not at a market peak and not at the absolute bottom of the market. You’d be doing fine as long as you keep your losses small!  Maybe use a stop loss or just be quick to cut off the pain and never ever put too much money in one stock!  If you do that, I forecast a profitable year for 2018 and/or many years thereafter.  I wish you a prosperous future.


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