The Too Hard Pile



Any person who thinks investing is easy or that he is going to be able to get every stock pick or market-related forecast correct is simply fooling himself. We cannot assure investment success by buying shares of the company that sells our favorite products.  We cannot guarantee success by following the latest headlines or trends either. For example, consider the following:

  • According to Statista, since 1980, global cigarette consumption has increased by 30%. Over that same period, shares of Altria (formerly Philip Morris) are up nearly 12,500%.
  • On March 27, 2000, shares of Cisco closed at an all-time high of $80.0625. The company’s earnings under U.S. Generally Accepted Accounting Principles (GAAP) that year were $2.7 billion. In the 15 years since, it has averaged a little more than $6 billion of GAAP earnings. Currently its shares are trading roughly 65% below that all-time high.
  • Pre-orders for Tesla’s new Model 3 electric car are approaching 400,000. The car will not be released until late-2017 at the earliest. The shares are currently trading about 10% below the all-time high they reached last July.
  • In 2009, the U.S. economy had its worst year in most of our lifetimes. The S&P 500 Index rose more than 23%.
  • Near the end of the last decade, many pundits were speaking of peak oil and worried that there would not be enough oil produced to meet demand. Some even predicted oil would soar to $200 per barrel (it peaked under $150 in 2008). Since then, technology has allowed us to access oil from shale economically and U.S. production has grown well beyond expectations. Earlier this year, oil prices tumbled to their lowest levels in more than a decade.

No matter how knowledgeable a person is, his odds of being able to forecast correctly, at least on a consistent basis, are slim. This is partly because the future is more random than most of us would like to admit. In addition, as shown by some of the examples provided above, future performance (such as earnings and economic growth) does not tell us all that we need to predict what the outcomes might be. In addition, outcomes are the result of performance relative to expectations. Predicting future performance is hard enough. Determining how it will stack up relative to expectations is nearly impossible. We also have an emotional need to fit in, making it harder to have a viewpoint that goes against the grain.

As investors it is important for us to remember the points made at the beginning of this commentary. It is hard to forecast the future. It is best to stick to what we know and understand. It is best to implement an investment process that can be applied consistently and take advantage of our strengths as investors. It is also important to remember that there are some things that are simply too hard. Warren Buffett has talked in the past about his three boxes for investment ideas:

  • In
  • Out
  • Too Hard

Similarly, there are times when we have looked at potential investments and decided not to invest because we found it too hard to understand the business well enough to make an informed investment decision. There are others that we have simply passed up because the valuation was too high. We always prefer finding investments that meet our investment criteria and are trading at an attractive valuation.