It’s that time of year when my hometown briefly captures the attention of the nation. A huge audience tunes in to an event that takes place here on the first Saturday in May — the Kentucky Derby.
In addition to the tens of millions who watch on television, 165,000 party-goers crowd into Churchill Downs to experience the tradition, wagering, and cheering firsthand. It’s the most discussed and anticipated thoroughbred event of the year.
Before the race, a “vote” is taken as to which horse will win. Participants vote with their pocketbooks by placing their bets, and the horse on which the most money is wagered becomes the favorite. Rarely do the fans in any sport spend more time studying data, reading commentary, or listening to experts before reaching a decision. The eventual favorite reflects the collective wisdom of the racing world.
Given this, you would expect the favorites in this race to have a record of success. You’d be wrong. Over the past 35 years, the favorite has made it into the winner’s circle only six times. That’s a failure rate of 83%! Based on extensive knowledge of the horses’ recent histories, people “in the know” make educated judgments about how the horses will perform on a given day. But they’re just guessing. No one knows for sure.
In a sense, the financial markets aren’t much different. When an investing professional offers stock, bond, and mutual-fund recommendations, he doesn’t know where the markets are going next — any more than you do. But he may know where they’ve been; that is, he may know how they’ve behaved in the past under similar economic circumstances. The expert knows more history, that’s all. Based on that knowledge, he forms opinions as to how the markets will behave in the near future. But reality isn’t that simple. As Warren Buffett has observed, “If you could simply extrapolate the past into the future, the richest people would all be librarians.”
Two things make accurate forecasting difficult. The first is that one or more of the governing assumptions will turn out to be incorrect. However, the forecasters don’t know which ones are wrong, so they can’t fix them. The other is that the underlying assumptions are incomplete. But since the forecasters don’t know which factors have been left out of their equation, they can’t include them. Thus the adage, “You don’t know what you don’t know.”
With this in mind, a certain humility should be in order concerning one’s ability to profit (and help others profit) from correctly anticipating coming economic events. Unfortunately, humility is not much on display in the leading financial magazines. The bold headlines, which claim the ability to know what’s going to be best for you in the coming months, shout from the covers. For example, Money’s Investment Guide 2015 promised to explain “Your Best Moves Now!” Not to be outdone, Forbes’ cover promised a “Road Map to Riches” for the coming year.
This is potentially harmful stuff. It gives the impression that the magazines’ experts have the skill to accurately predict the economy and markets, and downplays the reality of risk. In fact, financial magazines, like horse-racing fans, have a mediocre track record when it comes to their specific recommendations. Compounding the damage, they rarely revisit their investment recommendations to announce when it may be time to sell.
If you’ve been reading SMI for very long, you will likely have noticed that we don’t make forecasts as to what the future holds for the markets. We’re willing to admit we’re clueless about that. The only thing we can say with confidence about the future is that it will arrive in surprising ways. That’s why we have created flexible, mechanical strategies that adapt to the ever-changing environment.
It’s our belief that it’s impossible to self-destruct financially if your decision-making is pointed in the direction of God’s glory and guided by His protective biblical principles for wealth management. If it’s your desire to have confidence and peace of mind in managing your finances rather than relying on the guesswork of others, ask God to help you learn the basics you need to become a faithful and effective steward. It’s a prayer He’s eager to answer. “If any of you lacks wisdom, he should ask God, who gives generously to all without finding fault, and it will be given to him” (James 1:5).