Making Money is More Important than Making Predictions

Making Money is More Important than Making Predictions

At this time of year financial predictions abound. But are they helpful? Is anything that is 25% correct helpful? About 75% of predictions turn out to be wrong, making 25% accurate. But, here’s the the beauty of investing in stocks: If you follow my SUCCESS THROUGH SIMPLICITY approach, you don’t need to be able to make predictions to be successful. I understand this may be a very controversial statement, but I have a 25 year, almost 12% compound annual growth rate (CAGR) record to back it up. I read and study predictions, but largely for the purpose of understanding what is likely to turn out wrong. In my newsletter the first and most confident prediction is always, “Most predictions you read at this time of year will be wrong.” If you read the book, STOCKS for FUN and PROFIT~Adventures of an Amateur Investor,  you will see how my predictions turned out vs. the experts and the record is pretty good. However, I don’t use those predictions to dictate investment approach, because I know I don’t hold a crystal ball.

Here are a few irrefutable facts:

  1. Investing in income producing assets is critical to achieving financial security and building wealth.
  2. The stock market has an almost century long record of delivering about 10% CAGR.
  3. Investing in larger, solid, generally dividend paying companies, and sticking with them through good times and bad, will help you achieve returns similar to the market. This is vastly superior to interest bearing investments with current, extremely low interest rates.  It is also how you reduce workload managing investments.

It took me a long time to figure out how simple it is.


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4 thoughts on “Making Money is More Important than Making Predictions”

  • How do you see Cryptocurrencies and the Marijuana stocks fever? Are they going to become important for long term investing or it is just a bubble?

    Also, is the P/E over 20 a rule carved in stone or you would open an exception depending on the company?

    Great blog btw.

    • Hi Rombizio. Thank you for your questions. One chapter in the book is titled “Investment, Expense or Speculation: Which is it?” All three of these items are often called “investments” as this word evokes a more positive image than the other two words. It is important to distinguish between them. Cryptocurrencies and Marijuana stocks, in my opinion, clearly fall into the speculation category. Speculations can rise and fall dramatically. No one knows how high they will rise, when they will peak or when they will fall, but most end up with purchaser regret. My approach is as an “investor,” not as a “trader,” and not as a “speculator.” Thus they are categories I am not interested in. Both Blockchain and marijuana are likely to give rise to valid industries but it is almost impossible to predict at this time which companies will prevail. Many, many internet retail sites were born in the late 1990’s but very few exist today. On your second question, a P/E ratio of over twenty is not set in stone. There are times when growth potential or other factors justifies a higher ratio. It is a cautionary signal. I watch cash flow a lot so if P/E is high (i.e. earnings yield is low) but cash flow is still good then a purchase could be warranted. Hope that helps and thanks again.

  • Hi Herman — the 10% average annual growth rate that you mention, is that taking into account dividends (i.e., 5% growth and 5% dividend return), or strictly 10% from the growth of stock prices alone? Thanks!

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