Can You Throw Darts at a Wall Better Than a Blind Monkey?

Embrace market volatility, don’t try to escape it.

Bulls and bears make money, but pigs will get slaughtered.

Wall Street truism, popularized by Jim Cramer

The most common question I get asked by new investors is when they should invest in the market. Do you think there’s a recession coming? Will the Fed drop to negative interest rates in 2022? Will the Wall Street Bets reddit forum pick up my stock and take it to the moon? To all these questions, my answer is the same: I don’t try to predict the future, and neither should you.

“It’s in the nature of stock markets to go way down from time to time. There’s no system to avoid bad markets. You can’t do it unless you try to time the market, which is a seriously dumb thing to do. Conservative investing with steady savings without expecting miracles is the way to go.”

Charlie Munger

Humans are notoriously bad at making predictions. Actually, that’s an understatement, we embarrisingly bad. Surely the experts would do better right? Sadly, “experts” perform no better at forecasting than chimps throwing darts at a wall. The reality is that most systems display a degree of entropy that’s difficult to account for in our models.

The things we can’t forecast are the short-term gyrations – the white noise that’s largely stochastic. The reason we can’t predict what the price of the S&P 500 will be 60 days from now is because a lot of it is truly random. An increasingly large body of evidence is leading researchers to believe that in the short term, the markets behave a lot like a chaotic entropic system.

Don’t worry, not all hope is lost. Not all predictions have gone to shit. Although we can’t predict who the next President will be (even by normal standards, the “experts” really outdid themselves with their predictions on the 2016 election), we are pretty good at predicting the long term state of affairs. We can be pretty certain in our long term projections, because we keep them purposely vague.

“I make no effort to predict the course of general business or the stock market. Period. However, currently there are practices snowballing in the security markets and business world which, while devoid of short term predictive value, bother me as to possible long term consequences.”

Warren Buffet

In the long term, we can be reasonably certain that the market will go up. Notice how I didn’t specify my prediction, and kept it purposefully vague. We want to be vague because it gives us a higher probability of being right. Specific long term predictions will set us up for failure, since humans tend to match their behavior to fit their predictions. Intuitively, most of us already know this: as humans we peg our self worth to our skills and identity.

For the stock market to be negative over our entire investing horizon, technological progress would have to grind to a halt. The stock market has never been a loser over a 30 year span in the entire history of publicly traded markets. If we end up being the first, we would have much larger problems at hand than our investments. The world would probably be in a Category 5 economic shit storm. Think along the lines of nuclear holocaust, ravaging pandemic with 50% mortality rate, total anarchy, collapse of the state, etc.

Now that we’ve decided predictions are fruitless, when should we buy stocks? The answer is right now! Every day you miss out on purchasing your asset is another day of opportunity cost and missed returns. When we buy and hold for the long term, we don’t care about market timing, because it’s all white noise in the long run anyways. In fact, as long we hold onto our investments for long enough, getting in at the top of the market is still better than getting in late.

To achieve your financial goals, you don’t have to be perfect. We just want to be good enough. We don’t need a completely apathetic view of our finances to be successful, but we do need to be realistic. Any action is better than no action. The worst thing you can do is sit on your ass with too much excess savings in cash. I use FOMO to encourage myself to invest in the market. Do you really want to miss the days when the market pops? 90% of the returns over the past 100 years can be traced back to 10% of the trading days in the market. What sparks these disproportionate returns in the market? This will be the topic of my next article, Seeking Out Asymmetric Returns with Optionality.

This is article #3 in the series Saving for Retirement in Your Early 20s.

You can view the previous article on risk tolerance here.