Any fool can learn from his own mistake, but a wise man learns from someone else’s.
My eyes glaze over and my nose turns up whenever someone makes macroeconomic predictions. One cannot overstate the repulsion I feel. The hubris! I always want to say, “you should write down all your predictions, just so you can look back at them and realize how useless they are.”
Well, I could have used such tough love six weeks ago. And nothing I predicted has even turned out to be incorrect. Unemployment is over 20%! But therein lies the rub: you have to be right twice. First with your prediction and then with the stock market’s reaction. And it’s that second part that will kill you.
In Warren Buffett’s speech over the weekend, he illustrates this point. He spoke of a neighborly farmer who offers you a wildly different quote on your farmland every day. Mr. Buffett points out that a lot of people will profess to know what the farmer will quote you next week, or next month, or next year. Which is of course madness. No one knows what the farmer will say next month. Not even the farmer. He’s a raving lunatic after all! And given this glaring weakness, beating him at his little game should be a rather straightforward process.
Yet instead, I traded an area I have competency in — identifying wonderful companies trading at fair prices — for something I have zero competency in — predicting the short-term gyrations of the stock market. I got greedy. I expected prices to decline, so I sold off WFC & DIS in a hurry and bought GOOGL & FB at a glacier’s pace.
And really that’s the worst thing I could have done. If I had sold quickly and bought quickly or even sold slowly and bought slowly, I’d have been better off. But having sold quickly and bought slowly, I’ve managed the worst possible return given the knowledge available at the time. Now perhaps I’d be singing a different tune had the stock market languished these last 6 weeks. And that’s why I’m glad it hasn’t. Because then I’d still be susceptible to this same mistake at a future date. In other words, the worst thing that can happen to a gambler is to win.
When you see great companies trading at a decent price, buy them.
I would have never thought this was a lesson I had needed to learn. I would have counted myself in the top 1% as far as being immune to macroeconomic forecasting goes. Yet here I am. I suppose it bears mentioning that it’s one thing to be able to recite Peter Lynch and Warren Buffett ad nauseam to anyone polite enough to listen, but it’s another to actually live it.
-Dan Hansen
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