Recently, I received an odd letter from a new Oxford Club Member. He had visited our archives, tracked our portfolio changes from month to month over the last five years and concluded that we possessed some mystical secret about the stock market.
"How did you manage to prosper in both the financial meltdown and the recovery that followed?" he asked. "How could you know what the market would do?"
Hmmm... He should have read the monthly commentary instead of just monitoring the investment recommendations. (Although, granted, five years of old stock market commentary is a lot of ancient history.)
We didn't know what the stock market would do five years ago. We still don't today. And we never will.
Our secret is an open one. We adhere to an investment system that allows us to capitalize on the uncertainty inherent in financial markets. We profit, in part, by knowing what we
don't know.
What are we ignorant of? Here's a partial list:
- How fast the economy will grow
- What interest rates will do
- What inflation will be
- Whether the dollar will rise
- How Washington will govern
- Whether gold will shine
- And when the stock market will head south (as it always does eventually).
And that's just for starters. When we make a stock recommendation, we don't know how high the stock will go, when it will peak or how far it will fall. (And we don't need to.)
On the positive side, we do know a few good things. For instance, if your goal is to reach financial independence, the easiest, least risky way to do it is to enhance your education and job skills, maximize your income, minimize your expenses, save as much as you can, let it compound as long as you can, buy quality, asset allocate properly, diversify broadly, run trailing stops to protect your principal and your profits, and keep expenses and taxes to a minimum.
But getting back to what we don't know...
We aren't ashamed to confess our ignorance about what lies ahead. As historian David McCullough likes to say, "There is no such thing as the foreseeable future." Yes, there are plenty of articulate and telegenic men and women making a good living guessing. But once you're in on the burlesque, listening to all those economic forecasts, market calls and price targets can be a real hoot.
Some folks wonder how we've managed to succeed with such a cloudy crystal ball. After all, the independent
Hulbert Financial Digest has ranked
The Oxford Communiqué among the best-performing investment letters in the nation for over a decade now.
In truth, our approach has a long pedigree, dating all the way back to 327 B.C. and the publication of one of the world's great investment primers: Plato's
Apology.
As you may recall, Socrates was on trial - and, ultimately, sentenced to death - for corrupting the youth of Athens. He had done no such thing, of course. What he had done was educate and inspire students, teaching them to challenge arguments from authority and question what they knew to be true. In the process, he frustrated and embarrassed many powerful people with his persistent line of questioning, known today as the Socratic Method.
Why was he such a gadfly? According to the
Apology, the oracle at Delphi had pronounced Socrates the wisest man in Athens. Yet no one was more astonished - or more disbelieving - than Socrates himself. So he immediately set out to disprove the oracle by finding a wiser man.
He started by examining a politician with a reputation for great wisdom (and the ego to go with it). Not only was the pol unable to justify his beliefs, he resented Socrates' challenge to his authority.
"So I left him," Socrates laments, "saying to myself, as I went away: Well, although I do not suppose that either of us knows anything really beautiful and good, I am better off than he is, for he knows nothing, and thinks that he knows; I neither know nor think that I know.
"In this latter particular, then, I seem to have slightly the advantage of him. Then I went to another who had still higher pretensions to wisdom, and my conclusion was exactly the same. Whereupon I made another enemy of him, and of many others besides him."
In the end, Socrates discovered he was indeed the wisest man in Athens. Not because of how much he knew, but because he understood how much he
didn't know.
This is a foundational investment lesson. One of the biggest hurdles facing novice investors is their own lack of skepticism - or doubt.
Socrates makes two important points. First, he tells us to acknowledge our limitations, to face up to our own ignorance on certain matters. He also admonishes us to distinguish between those who speak well and those who speak the truth.
To that point, the $72 trillion world economy is too big, too dynamic and too complex to be accurately predicted with any reliability. The same is true of global stock and bond markets. What they will do next week depends on next week's news. We can't know that now.
Otherwise it would be
this week's news.
This is a tough concept for many investors to accept, what with thousands of brokers, planners, analysts, investment letter editors, and mass media publications making predictions so brimming with confidence they sound like dead certainties.
These folks are credible and convincing. History demonstrates, however, that they are often very wrong. One reason "the experts" get away with these pretensions is we let them. Our craving for predictions seems more deeply entrenched than any innate sense of skepticism.
The national media goads us too. For example, twice a year,
The Wall Street Journal polls 55 of the nation's leading economists to see what lies ahead for the economy, interest rates, inflation and the dollar. Most answers are way off the mark. The consensus isn't so hot, either.
It's gotten to the point where even the
Journal staff is in on the joke. Reporter Jesse Eisinger once wrote, "Pity the poor Wall Street economist. Big staffs, sophisticated models, reams of historical data, degrees from schools known by merely the name of the biggest benefactor, and still they forecast about as well as groundhogs."
Punxsutawney Phil may actually have an edge on most of them.
In short, when it comes to investing, doubt is your ally. Uncertainty should be your natural state. If you are taking investment advice from a soothsayer, you are wasting your time and money.
Good investing,
Alexander Green
Chief Investment Strategist, The Oxford Club
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