Successful Investing Is Not About Predicting the Market

|
 |  Includes: NICK, SOHU, UNH
by: Eddy Elfenbein

If you can look into the seeds of time, and say which grain will grow and which will not, speak then unto me.

Generally, I’m not a big fan of the story, “so-and-so said to buy stock X, and it’s down therefore so-and-so is a moron.” Being wrong about the market doesn’t make you a moron. Claiming you didn’t say something you clearly did, however, does. Still, it’s worth taking a look at what the experts said that 2008 would have in store.

I dug up BusinessWeek’s article from last December, “Where to Put Your Cash in 2008.” Ah, those were innocent days!

William Greiner said that his favorite stock is Starbucks (NASDAQ:SBUX). Youch! The stock is off by about 30% YTD. It gets worse. Tobias Levkovich said to buy financials. No comment needed. Jason Trennert had a year-end target for the S&P 500 of 1680. Leo Grohowski’s favorite stock was FCStone Group (FCSX) which is now down by about 60%. David Bianco had an S&P 500 target of 1700, and his favorite stock pick, Oracle (NYSE:ORCL), is about flat for the year.

So what’s the lesson here? Is it that all these people are morons and we should never listen to them? Not at all. The great thing about investing is that you don’t need to predict the future. You don’t have to predict elections. You don’t even have to predict Fed policy. Successful investing isn’t about predicting what the market will do, it’s really a game of risk management. In fact, knowing that you can’t predict the future is the best starting point. Each investor should ask themselves, “given that I can’t predict what will happen 12 months from now, what’s the best way to position my portfolio to profit?”

That’s why I favor a diverse portfolio of financially sound companies trading at reasonable prices. I shouldn’t be making fun of anyone’s predictions since I have UnitedHealth Group (NYSE:UNH) on my Buy List. The stock has gotten clobbered all year. Still, I’m a bit ahead of the market because I’ve diversified my Buy List. I love Nicholas Financial (NASDAQ:NICK) and I bought some more last week. I have no idea why the stock is so low. All I know is that it is. I don’t know when it will go closer to its true value. It could be one day or one year. Or it could fall off a cliff. I don’t know, but I’ve loaded up my Buy List with enough stocks like NICK to bend the odds in my favor.

Yesterday, Sohu.com (NASDAQ:SOHU) made news because it reported amazing earnings results. Yet the stock is down as of yesterday. That may not make a lot of sense, but that’s how the market can act in the near-term. This is a good time to revisit my investing philosophy from my site's FAQ page:

What's your investing philosophy?

My investing philosophy is very simple: Investors ought to buy and hold great companies. It doesn't get more complicated than that. Avoid trading in and out of stocks, and be well-diversified. Investors should own at least 12 stocks, and have a goal of owning 20.

Be prepared for bear markets. A lousy market can strike at any time without warning. All stocks go down. It doesn't mean the stock is broken. Stocks are volatile by nature. That's the price you pay for superior returns. If you can ride out the bad times, you'll be rewarded. If you can't bear to see your portfolio drop by 50%, do not invest in the stock market.