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Is Your Investment Strategy Based on Facts or Forecasts?

June 16, 2016

Recently I was reminded of the problems created when investors speculate about the future. Often it is easy to form conclusions from less-than-sufficient factual support.


Our human minds are prone to building these little bridges between possibilities and beliefs. This is dangerous behavior for the investor. One small bridge can lead to another, and then another. Pretty soon the investor forgets an outcome is merely possible, and starts to think the event is very likely, or even certain, to happen. Next thing you know, the investor is selling some stock at a lousy price, or getting out of stocks altogether.


Peter Lynch used to talk about dealing in facts, not forecasts. This is simple but profound advice. If you are looking for actionable investment ideas, stay away from forecasts. Interest rates, general economic recessions, the price of oil, short-term stock prices - nobody can predict these things accurately. Actually, there is one way. Get a lot of people to issue frequent forecasts over a long period of time, and eventually someone will be right, and they'll go out and write a book about it. And the book will be interesting, sell lots of copies, and probably will include predictions of similar events that are sure to happen again in the future. Unfortunately, only the future can tell us which forecasts are accurate - and this does investors no good whatsoever.


When it comes to making investment decisions, sometimes the right conclusion is simply "I don't know." Some may feel that it is impossible to make good investment decisions without fancy predictions. I think the evidence is to the contrary. The best investors stick to what they know and stay away from what they don't know. Success in stocks is made from paying close attention to facts, and ignoring forecasts. It's worked that way for Ben Graham, for Warren Buffett, for Peter Lynch, and others. And it can work for you too.

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