A new year is upon us, and with it yet another swathe of share market forecasts. With unnerving accuracy, and seemingly reasonable justification, experts of all persuasions are offering their prophecies to anyone who'll listen. And unfortunately they are finding, as always, a large and ready audience.
These financial soothsayers are perhaps neither disingenuous nor deluded. In most cases they are merely doing their best to provide what the media and investing public demand. Indeed, these demands are in many ways understandable too; who wouldn't want to know the trajectory of prices in advance? The reality though is that the expectation for accurate and meaningful predictions is naïve. As famed physicist – and Nobel Prize winner – Niels Bohr said, "Prediction is very difficult, especially about the future".
This view, while no doubt appearing rather cynical, is not without sound support.
Right… or lucky?
History, as always, offers great insight. Past experience tells us that predictions on market prices rarely prove accurate. And while there will almost certainly be those that have their forecasts proven correct from time to time, it is a near statistical certainly that their calls will, on aggregate, be little better than what chance alone could explain. Even a broken watch is certain to be right twice a day.
It has been said in a variety of ways, but perhaps Aldous Huxley said it best: "That men do not learn very much from the lessons of history is the most important of all the lessons that history has to teach."
Despairing though this is, the good news is that accurate foresight of market moves is of little import to long term investment success. Rather than asking where the ASX 200 will be at year's end, investors will be far better served by focusing on individual businesses and whether or not they are available at prices that will allow for meaningful investment returns.
Buy well – and wait
Unfortunately, of course, that requires assumptions of the future. Thankfully though, accuracy here is not as important as you might think. To paraphrase Keynes, we need only be generally right (as opposed to precisely wrong).
Whether a company turns out to grow at 3% or 6% on average over time, long term investors are likely to avoid substantial disappointment provided they pay a sensible price. Higher is always better, but even the lower figure will likely help support the share price and dividend growth. (The same however cannot be said for any significant and sustained drop in earnings. Should that occur, investment losses are all but guaranteed!)
The investment maxim of buying low and selling high is of course undeniable, but investors should also remember that buying low and buying at the bottom are two different things. Of course we would all love to jump in at the best price possible, but that goal is not realistic.
Your shares may certainly prove to trade at a lower price a week, month or even year from today, but so long as the business they represent continues to see its earnings march upwards, so too will your investment returns – as long as you've paid a fair price
Foolish takeaway
So worry not about the gyrations of broad market indices and their likely position at years end. If you need a prediction, satisfy yourself with this: great business purchased at sensible prices will always give you great returns over time.
