Even If You Knew The Future You'd Likely Make Investment Mistakes
Knowing the news isn't enough.
“If only I had known . . .”
It is a common refrain repeated by so many about how close they were to getting it right save for one key piece of information.
It seems like all it would take is a little foresight or insight, and then one could be a super investor making Warren Buffett and Charlie Munger among others look like amateurs.
That’s why the phrase (excuse) is so salient. That’s why it’s said so often.
Yet it turns out knowing the future would often lead you astray and perhaps worse off as it would give you false confidence leading to excessive risk leading to explosive loss.
To be clear I am saying if you only knew some key information about the future—not pure omniscience. Obviously knowing the exact details of the market going forward as if you were reading a perfect history book would allow you to time near perfect gains.
There are many examples of this.
Back in the summer of ‘16 suppose you knew the Brexit vote outcome ahead of time and exited European and UK stocks on June 23—right before the results were released and the market reacted. Sure, UK and European stocks declined by about 13% and 11% each bottoming out over the next two market days. But would you have then gotten back in just two days into the turmoil? Those same groups of stocks were up over then next 18 months by about 30% for the UK and 43% for Europe, and that’s before we include the benefit of dividends.
What about with Covid? Suppose in March or April of 2020 you knew the news details of the coming virus explosion, subsequent deaths, knock-on chaos including BLM protests and riots, new/worse waves, political divisions, etc. all to come over the next seven months. Looking past that to include the vaccine release in November of 2020, suppose you knew in March/April 2020 how poorly and controversially the rollout would be, the on-going political and economic turmoil, etc. Would you have been all in on stocks?
The S&P 500 was up over 85% from the bottom in March of 2020 until the short-term peak in early 2022 when the Russian invasion of Ukraine and inflation outbreak pulled markets back. The 2022 decline was strong but short lived. Even though the index would fall about 25% in that pullback, it would still be up from March 2020 through the recent peak earlier this year by more than 140%.
Suppose you knew on Jan 5, 2021 about the riots to come the next day. Would you have suspected the S&P 500 would have been up throughout the day as the riots unfolded ending up over 2%?
The tariff saga we are currently suffering through brings another example.
Most prognosticators including myself suspected (hoped) that Trump in his second administration would be very similar to his first go when it came to trade and tariffs—more bluster than action. Targeted tariffs, rewording deals, big talk, etc.
How wrong we were!
Had we known how front and center a trade war would be along with how big the tariff threats would become we would not have predicted the market to do what it has done.
The S&P 500 being down is not surprising. International markets outperforming the U.S. significantly and in fact being positive in many cases over this time span certainly is surprising. Consider the following total return data (with dividends) through April 17:
Since the election (Nov 5),
S&P 500 -6.95%
MXEA (developed markets stocks) +3.37%
MXEF (emerging markets stocks) -4.60%
YTD,
S&P 500 -9.84%
MXEA +6.80%
MXEF -0.04%
Since the inauguration (Jan 20),
S&P 500 -11.61%
MXEA +5.51%
MXEF +0.34%
Knowing our trade-war future would not have helped us on January 19 or December 31 last year, and it would have only been right for a brief period on November 4, 2024.
Obviously there are reasons for this unexpected outperformance by the rest of the world. Some of it is likely due to the U.S. vs. the world trade war not looking too good for the U.S., but much of this outperformance came before our “Liberation” day.1
Explanations that rely on the value of the dollar, which certainly tracks with this stock market behavior, doesn’t actually explain anything. That just pushes it back a step and into a different asset that begs the question.2
The lesson is that rather than attempt to predict the future rely on what you can know.
Invest appropriately for your risk tolerance and financial objectives including time horizon. Stocks among other investments can certainly surprise you, and you can be wrong before you are ultimately right.
Trust in valuation rather than vibes. In the long run valuation is all that really matters.
Don’t react to news. You won’t be ahead of the market, and you very likely won’t be accurately predicting what comes next even if you are accurately predicting what comes next.
PS: Happy Easter, everyone!
It is also interesting that the expectation of Trump (from the election up until the inauguration) was favorable for U.S. stocks relative to international stocks and in absolute terms while the actual experience of Trump (since the inauguration) has been quite the opposite.
Logic and grammar nerds will notice that I am using that phrase correctly.