“It's tough to make predictions, especially about the future.”
In finance, it’s popular to make forecasts about the year ahead. Since we’re not in the business of predicting the general stock market fluctuations, here is a list of some of Wall Street’s most venerable banks' 2023 forecasts. Attempting to forecast future short-term movements is equivalent to predicting market timing—both proven to be an inefficient use of investors’ time and a risky foundation on which to base capital allocation decisions.
In lieu of making any predictions, I’ve put together a short list of investment tenets you should keep in mind for 2023:
Expect the Unexpected
The effects of politics, wars, market crashes, and technological innovations are magnified because they confound our expectations of the world as an orderly place. In a world of disruptions, it’s important to remember just how much we will never understand. Many events which affect markets lie beyond our realm of normal expectations. Due to recency and hindsight bias, we are prevented from adequately learning from the past. The next financial crisis will not typically resemble the previous. Nevertheless, people tend to concoct explanations for them which makes them appear more predictable.
More random surprises lie ahead. When, where, and how is to be determined.
Focus on What Doesn’t Change
“I very frequently get the question: 'What's going to change in the next 10 years?' And that is a very interesting question; it's a very common one. I almost never get the question: 'What's not going to change in the next 10 years?' And I submit to you that that second question is actually the more important of the two -- because you can build a business strategy around the things that are stable in time. ... [I]n our retail business, we know that customers want low prices, and I know that's going to be true 10 years from now. They want fast delivery; they want vast selection. It's impossible to imagine a future 10 years from now where a customer comes up and says, 'Jeff I love Amazon; I just wish the prices were a little higher,' [or] 'I love Amazon; I just wish you'd deliver a little more slowly.' Impossible. And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.”
- Jeff Bezos
Propensity to Consume
In agricultural societies of the past, farmers were mostly self-sufficient. They worked a lot but consumed little. Today, the work-to-consumption ratio has been inverted. Due to human nature, when living standards rise, most beneficiaries are never content with what they have or where they happen to be. There is always a better home, a better car, better furniture, a better vacation, and so on. Aspiring to lead a more luxurious life keeps consumers working and constantly working harder. The appetite to consume leads to acquiring more debt in order to acquire more stuff. Good for businesses and the owners (stock) of those businesses.
Think Long Term
There are no guarantees when it comes to investing in the stock market. The stock market does NOT work like a casino. The more time you spend at the casino, the more likely you are to lose. Contrary, history shows the longer you own a collection of businesses (being invested in the stock market), the greater your odds of success when it comes to generating a positive return on your investment. Since the mid-20th century, if you randomly picked one day during this period and chose to invest for just those 24 hours, the probability of making money is about the same as a coin toss - 50%. However, the longer you increase your holding period, the higher the probability of success. Investing for any one year would have generated a positive return almost 73% of the time, while investing for 10 years increased your chances to over 94%.
The ability to think and act for the long term is one of the few advantages left in the markets.
Be Greedy When Others are Fearful
“Bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price…During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted.”