About the intelligent investor
The weekly column of ‘The Intelligent Investor’ by Jason Zweig, has been published in the Wall Street Journal for about a decade and is published exclusively in Globes. According to Zweig: “My goal is to help you distinguish between the good advice and the one that just sounds good”
About Jason Zweig
One of the senior journalists of The Wall Street Journal. Author of the book “Your Money and Your Mind: How Neuroscience Can Help You Get Rich”, and the editor of the updated version of the bestseller “The Intelligent Investor”, described by Warren Buffett as “the best investment book ever written”
Imagine if you could know tomorrow’s news today. What would make you better investors?
● The war on inflation: will the American Fed’s medicine kill the patient?
● The Economist: The run to raise interest rates did not break inflation
On October 13, the Ministry of Employment announced that the consumer price index rose by 8.2% in September compared to the same month last year, thus dashing hopes that inflation was falling.
What would happen if you knew, on October 12, exactly what the next day’s inflation report would be?
You’d bet stocks would crash, after the no doubt restless market went into a frenzy over this news.
You’ll never guess what happened next. After plunging 2% when the market opened in the morning, shares reversed course almost immediately, rising about 3%, one of the biggest trend changes recorded in the middle of a trading day.
In fact, US stocks are up about 9% since their lows on the morning of October 13.
Perhaps people decided that the bad news wasn’t bad enough to push the Federal Reserve to raise interest rates even higher than 0.75%, the hike that was considered inevitable ahead of the November meeting. Perhaps they felt the news might be bad, but not as bad as their worst fears.
who knows? What we do know is that even if we had tomorrow’s news, even that does not guarantee that you will be able to make profitable trades. That’s why it’s so important to stick to a long-term plan, rather than chasing the newest illusion of certainty.
Investors should start hating certainty
One of the favorite sayings on Wall Street is that investors hate uncertainty. What they should hate, instead, is certainty. Just think of all the other things the markets have been certain about lately. As recently as late July, market participants were confident that after the Federal Reserve raises interest rates this year, it will cut them sharply again in 2023. It can be said that today there is no one left who expects it.
Last December, Tesla’s market value rose by almost $200 billion in four days, more than the market value of Ford and General Motors combined, all thanks to the belief that the high-tech carmaker’s growth could not be delayed. Tesla, meanwhile, is down 36% this year, wiping out nearly double its value growth at the end of the year.
In January, with a strong and almost unanimous consensus, market strategists predicted that stocks would rise between 6% and 11% this year. The S&P 500 index meanwhile fell by almost 20% in 2022.
Not long before that, they tried to sell so-called quality stocks on Wall Street, with high profitability and low debt, as a kind of insurance policy against what the economy might throw at you. Quality stocks have underperformed the rest of the S&P 500 by about 4% this year.
And just think of the arrogant confidence of gold and bitcoin enthusiasts, who have argued for years that the precious metal and digital currency are the perfect ways to protect your purchasing power. Meanwhile in 2022, with inflation running rampant, gold is down 9% and Bitcoin over 50%.
Not only the small investors and financial market professionals think they can guess exactly what is going to happen.
Consider the Wall Street Journal’s recent investigative series, “Capital Assets,” which exposed the alarming extent of stock and other asset trading by elected US officials.
Among the most avid traders in this area, the Journal found, roughly 85 senior federal officials, their families or their financial advisers made a total of more than 80,000 trades from 2016 to 2021.
The spouse of one of the clerks, for example, made 9,500 trades in one year, 2020, including stocks, options and short sales, or bets that the value of a particular asset will fall. This is an average of 38 operations each day that the markets were open. This is also an extreme example of what happens when there is an illusion of certainty. When you’re chasing the next short-term profit, and the adrenaline is flowing, it becomes easy to imagine that you know what’s going to happen.
The markets do not allow us to know what will happen
But markets don’t work that way. They don’t allow any of us, no matter how smart or far-sighted, to know exactly what will happen.
Self-control is the key to success in investing, but no less than it, alertness to the possibility of self-deception.
Beliefs that had developed into a sense of eternal truths – inflation is dead, interest rates will stay low for longer, there is no alternative to stocks, the big tech companies will never let their investors down, etc. – exploded in people’s faces. Just on Thursday, the Meta platform, Facebook’s parent company, announced disappointing earnings, and its market value plummeted by nearly $85 billion in one day.
These are precisely the times when investors need to be on guard against the next certainty. You should not act on every forecast, and the more certain the forecast sounds, the more you should doubt its correctness.
Every day for the next few days, someone with the ability to convince will tell you with great faith when inflation will end, when interest rates will drop, which industry is doomed and which industry will flourish.
This sure voice will be backed up by piles of data from the past. The data will give a relaxing feeling. Feel that you are not alone. You will be tempted to follow that voice. And you will almost certainly find out that he was wrong.
3 investment tips
1. It’s important to stick to a long-term plan, rather than chasing the newest illusion of certainty
2. Self-control is the key to success in investing, but no less than it, alertness to the possibility of self-deception
3. Do not take action on any forecast, and the more certain the forecast sounds, the more you should doubt its correctness