Why We Rarely Discuss What Might Be Next for the Market

How much time should investors allocate to trying to answers questions such as these?

  • Where is the market headed?
  • What action will the Fed take next?
  • When will interest rates change and by how much?
  • Will the US dollar continue to strengthen or weaken relative to the euro?
  • Will Greece be forced to exit the eurozone monetary union?

In our view, investors should spend only a little time debating these issues. It is not that we deem them completely irrelevant. They may even be topics of discussion at our weekly investment committee meetings. However, the majority of our meeting time is used studying businesses and trying to identify the ones in which we want to invest and/or want to hold. The big picture is important; however, it is also highly unpredictable.

We know bad things can happen. It is important to maintain a sense of fear about the market or a concern that money could be lost. Fear helps keep investors from being reckless and taking unnecessary chances. It is also important to remember that all investors can and do make mistakes. Overconfidence can lead to the largest losses.

When it comes to the markets, it is best to admit that no one really knows what is going to happen. If you have been following the events in Greece from the beginning, you begin to realize that even the experts on the situation are just making it up as they go along. How frequently have you seen economists make predictions about the probability of a “Grexit”? Trying to place odds on the likely outcome is simply too hard. In short, it is not the end of the world to simply say “I don’t know” every once in a while. In fact, the willingness to say “I don’t know” can actually be a positive development, indicating we are moving closer to the truth.

It is important to stop worrying about the “why?” It is simply not worth trying to play guessing games about what a single headline’s impact might be. Worrying about such outcomes adds stress to an already complex endeavor. The Greek situation could lead to a market correction. It might be a catalyst instead. Perhaps it just provides investors who have earned large gains over the past few years with an excuse to sell. It could even pass with no major market damage, as it has for the past few years.

Markets are volatile. A guest on a recent StockTwits podcast made the following generalization about the market:

The market rises by about 1/30 of one percent each trading day. The volatility each day is about one percent. [This means that] the noise is about 30 times greater than the value. The only way to get rid of that [effect] is longer and longer holding periods.

At BWFA, we often talk about how our approach centers on identifying attractively valued, well-managed companies that can be held for at least three-to-five years. In contrast, change is about the only thing that matters to traders. This helps highlight one of the benefits of being an investor, rather than a trader – change matters very little. Your results should come not from anticipating changes in the financial markets (which is nearly impossible to do successfully) but from avoiding deviations from your own investment plan.