Many people believe that the job of financial services professionals is to advise clients on the near-term direction of the market, prescribing which assets will outperform over the next week, month, quarter or year.
The landscape can be very confusing, as investors will find a tremendous divergence of opinion regarding the current state and future direction of the stock and bond markets. Just last Friday, the following three headlines appeared on the first page of the popular financial website MarketWatch:
•Stop! This is NOT like the dot-com bubble…it’s much worse according to this chart
•Why this economist says stocks are still cheap
•Why U.S. stocks are right where they ought to be – in one chart
No wonder people are confused. The three headlines would respectively indicate that the stock market is overvalued, undervalued, or priced appropriately.
What most people fail to realize is that investment professionals, no matter how smart they are, cannot consistently predict the direction of the financial markets. Many very smart financial professionals do understand that simple truth and don’t waste any time trying to do so. Warren Buffett once said, “A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting.”
If not predicting the direction of the market, what is the job of an investment professional? Simply put, it is to help clients form portfolios that allow those clients to achieve their life goals.
I have a good friend who made a fortune in the financial markets. He is one of the brightest people I know. Immediately following the election of Donald Trump, he sold a large percentage of his equity position and is currently holding cash. By his own admission, he has been spectacularly wrong, as the market has risen over 11 percent since Trump’s election.
Still, the most comical headline I saw on that MarketWatch page last Friday was “Nobody thinks Snap stock is worth the price.” Most novice investors understand that stock prices are determined by the interaction of willing buyers and willing sellers. If nobody thought it was worth the price, nobody would buy it!
The point people miss is that stocks represent ownership interests in real businesses, and it is the performance of those underlying businesses that matters over time. Ultimately, stocks reflect those business economics. Buy good companies at fair prices – or add to a broadly diversified index fund consistently over time – and you can sit back and let the businesses do the work on your behalf. Isn’t that an easier life than sweating over every failed prognosticator who graces your television screen or online finance page?