The Future Isn’t What You Think It Is

After writing this blog for two years now (almost three!), I’ve begun to noticed something — A surprising number of my readers can predict the future.

This future-predicting ability is a lot like a disease — Once they amass a certain amount of intelligence and money they catch this disease.  It seems to be catching.  Apparently, incredible brain power allows for the predicting of the future, and all that amassed wealth is proof of this new super-human ability.

Here’s just a small taste of the predictions I’ve gotten from readers so far this year:

  • Self driving cars will completely replace traditional cars, and we’ll all take self-driving Ubers in the near future.
  • Gasoline prices are going to skyrocket very soon, and we’ll replace our gas guzzlers with electric powered cars.
  • Robots are going to make most jobs obsolete.  We’ll all be poor and penniless as a result.
  • Zombies are going to takeover, and gold will become the ‘currency’ of choice.
  • Vertical farms maintained by robots will overtake our skyscrapers and “dirt” farms will become obsolete.
  • Retailers will begin charging us to try on clothes in the store, so we don’t just leave the store and buy it online instead.

Uh-huh.  Riiight…


Investing Means Predicting The Future

I see these “prediction of the future” comments most often in my investing posts.  Why?  Investing itself is really about putting money down on the future.  Will the economy grow or will it shrink?  Will stocks rise or fall?  To a certain extent, investing is all about predicting the future.

And there’s absolutely nothing wrong with that!

I love predictions of the future as much as the next person… but my hoverboard was supposed to arrive two years ago!

By their very nature, investors are an optimistic lot — You rarely see predictions of a flu virus wiping-out a huge portion of the world population.  If that was the prevalent theory, we’d all be hoarding gold like Smaug.

Investors (by their very nature) are predicting a better future for the world — a positive future despite the world’s myriad of problems.

Yes, I’m an investor, but I don’t for one second believe I can predict the future.  Not even close.  Some of my investing articles will present one possible idea about the future, and I sometimes worry that markets are getting a little expensive, but by no means do I have a crystal ball that can predict the future.


Tomorrow Is Easy, 10 Years Is Hard

Have you ever woken up one morning and said, “Golly! Today seems a lot like yesterday!”

Well, today IS a lot like yesterday.  The world just doesn’t change all that quickly.  You can make a decent prediction about what tomorrow looks like only because it’s inevitably going to be very similar to today.  Real change takes time.  Years in fact.

If you try making predictions a little further out than tomorrow, that’s where things get tricky  — A prediction that’s 10 years away is harder to make with any level of accuracy.

bladerunner skyline
Hollywood loves to predict a dystopian future for humanity. Clearly, most investors are better at this predicting the future stuff than Hollywood.

I like to think of the future as a tree — A multitude of possible paths branching out from our current position.  The probability of any one of these branches occurring depends upon an incredible number of variables.  So many variables in fact, I find the future impossible to predict.

As investors, the further up that tree of possibilities we climb the less likely we are to be correct.  In other words, the further from today our prediction is, the more likely it is to be incorrect.

This is where long-term investing (which we all should be doing) gets really hard.


Investing in An Uncertain Future

If the future is so uncertain, shouldn’t we just throw our hands up into the air and give up on investing entirely?  No, of course not!

The real question is, how exactly can we make long term investments when we can’t accurately predict the future 10 years out?  The answer is, to find those inevitable situations that will still exist in 10 years.

Back in 1996, Warren Buffett gave us the answer.  In his annual letter to shareholders, he wrote about investing in these “inevitable” situations:

Companies such as Coca-Cola and Gillette might well be labeled “The Inevitables.” Forecasters may differ a bit in their predictions of exactly how much soft drink or shaving-equipment business these companies will be doing in ten or twenty years. Nor is our talk of inevitability meant to play down the vital work that these companies must continue to carry out, in such areas as manufacturing, distribution, packaging and product innovation. In the end, however, no sensible observer – not even these companies’ most vigorous competitors, assuming they are assessing
the matter honestly – questions that Coke and Gillette will dominate their fields worldwide for an investment lifetime. Indeed, their dominance will probably strengthen. Both companies have significantly expanded their already huge shares of market during the past ten years, and all signs point to their repeating that performance in the next decade.

Those words were published back in 1996, over 20 years ago.  Today those two brands still hold significant market share globally, but their franchises are now under attack.

Gillette has come under pressure from the likes of Dollar Shave Club, and Coke has lost market share to countless other beverages (Coffee, tea, water, craft beer, kombucha, etc) which are currently deemed “healthier” by modern society.

Dollar shave
With clever marketing and good prices Dollar Shave Club has made big inroads into Gillette’s traditional business.

Even so, Buffett was mostly right in his prediction.  He made a ridiculous amount of money on these two investments.  But, given a long enough time horizon even the “master of investing” can start to look a bit wrong.

Today those two brands seem less “inevitable” than they once were.  Revenues at these once impenetrable businesses are now in decline.

In the next 10 years, I expect both companies will have significant challenges to overcome as the trend continues. I’m not certain if they’ll be doing better or worse in the next 10 years, but I suspect they’ll still sell plenty of razors and soda cans.

The lesson here is clear — Every business can erode with time, but some erode far slowler than others.


Finding Inevitables

In 1935 the average lifetime of a company in the S&P 500 was 90 years.  By 2014 that metric had shrunk to only 18 years.  Clearly, the businesses contained in the index are now less durable than they once were.

This lack of durability doesn’t bode well for finding Buffett’s “Inevitables”.  In fact, even Mr. Buffett himself professed to having difficulty finding them:

For every Inevitable, there are dozens of Impostors, companies now riding high but vulnerable to competitive attacks. Considering what it takes to be an Inevitable, Charlie and I recognize that we will never be able to come up with a Nifty Fifty or even a Twinkling Twenty. To the Inevitables in our portfolio, therefore, we add a few “Highly Probables.”

Clearly, finding durable investments isn’t easy.  One possible solution is to just ignore selecting individual stocks entirely, and stick to index funds.  In that scenario, it doesn’t matter if companies rise and fall quickly — The index will simply add and remove companies as necessary.  For most individuals this will be a very effective strategy that will yield average (but good) results.

That said, some investors (like myself) might occasionally like to take a hybrid approach to investing — Hold a significant number of index funds, but also allow for investing in individual securities when it seems virtually certain that the individual selection will outperform the index.

Finding those outperforming investments isn’t easy.  The mathematics of such an investment aren’t hard to determine — The historical data for the S&P 500 is readily available online.  If you decide to follow this route, you should be well aware of the metrics you need to beat in order to venture off the well trodden path of index funds.

One potential place to look for such investments is among the Dividend Aristocrats — companies with 25 years of consecutively growing dividend payouts.  These firms tend to be dominant in their fields and gushing cash.  My own research indicates the Aristocrat companies that survive the longest also tend to be the strongest.

The big question (of course) is durability.  Will your investment be one of Buffett’s “Inevitables” that will endure for 20+ years, or will it be the next target of attack from Amazon.  Only time will tell.

Just be careful of those zombies, OK?

11 thoughts on “The Future Isn’t What You Think It Is

  • August 26, 2017 at 4:25 AM

    Uh oh, I made the self driving car and robot prediction. 🙂 I haven’t made any investments based on my predictions though.

    I generally stick with index funds but I do allow up to 5% of my portfolio to be invested in individual stocks.

  • August 26, 2017 at 5:00 AM

    Great post. I have learned that it is to hard to try to predict future trends. As you said, I just stick with broad mkt index funds. It is easier to own all of the stocks than trying to pick winners. I have hope that the future will be better than the past, but I cannot predict it.

  • August 26, 2017 at 5:13 AM

    Ah! Trying to predict the future is so hard. It is interesting how in today’s society nothing seems inevitable. Even Amazon is coming under fire from Walmart…who would have thought that would be possible.

  • August 26, 2017 at 6:32 AM

    I can predict the future. The markets will go down … and they’ll go up … and down again and …

    Once we’ve tasted a little bit of success, we love “sharing” with others to help, of course, but also to feel better about what we’ve done. Maybe it’s self-validation at a small (or large) scale?

    I’m really going to tune in to conversations when the market makes a major correction or two. I was too busy with significantly more important life matters the last time which is why the set-it and forget-it approach to investing via index funds have been a Godsend for me.

  • August 26, 2017 at 6:42 AM

    My husband has been raving about the self driving cars Google has been testing. I myself am curious what it’s like to sit in one of those cars.

    I think it will take a while for all the laws, regulations, and infrastructure to be put in place for those cars, but the future is full of surprises! Maybe we will have much more advanced means of transportation that will replace cars altogether. 😉

  • August 26, 2017 at 7:59 AM

    This is a great approach to think about investing. For me, being a passive long-term investor, essentially it is my faith in the economy. There’s no way to predict the future, but hopefully humans will eventually figure things out and ride out the ups and downs.
    Mao recently posted…My Minimalist Approach

  • August 26, 2017 at 12:30 PM

    I’m also still waiting for my hover-board too *impatiently taps foot*.

    Ahhh… predicting the future…so futile and such a waste of time. Just like buying lottery tickets. People who think they can predict the future SHOULD be richer than Warren Buffet by now, but for some crazy unknown reason, they aren’t. Hmm…

  • August 28, 2017 at 5:08 AM

    I invest for a variety of “possible futures”. I have found that betting on companies/industries with slow change, at the right price, offers decent chances of good results. My next step in the process is to go to bed and forget the password to my brokerage account for a decade or two…

    If I were you, I would look at the dividend champions, not the aristocrats. The former is a more complete list than the latter.

    I take a hybrid approach as well. The most interesting fact is that people do not just own S&P 500. Many end up slicing and dicing their index portfolios to hold a lot of individual funds.

  • August 28, 2017 at 5:39 AM

    I’m having a hard time lately with individual stocks. I think it will be easier to go with a good dividend index fund for a while. I won’t have to worry about individual companies and I’m pretty sure the index will be okay even with a big crash.

    That’s my prediction – good passive index funds will be fine in the long run. I’m looking forward to self driving car, though. It’d be great to not own a car at all.

  • August 29, 2017 at 6:15 AM

    You might even be right about the future and technology – that doesn’t mean you’ll make money. Technological forecasting success doesn’t result in profits, just look at the airline industry. In fact, my prediction is that investing into successful prediction of those futuristic techs will lose you money…

    Coke and Gilette are dull boring companies and they make good dividends. Perhaps boring is good. I’ll leave you with another Buffett favourite: “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future”

  • October 24, 2017 at 10:27 AM

    Not surprising to me after reading about Deloitte’s Shift Index (first published 2009), that analyzed performance of 20,000 companies between 1965 up to last year. Which found what most of us sense intuitively: at least a doubling of competitive intensity and large firm “topple rate” from leadership positions, more than 75% drop of return on assets, treading water even at top firms, increasing executive turnover, and Fortune 500 life expectancy falling from 75 to barely 15 years. While executive compensation has skyrocketed 11x (shown to be inversely correlated to shareholder value). So its a jungle out there, and too many companies are coping poorly with the challenges. Another study posits entrenched hierarchical top down management still prevalent at most companies is a major contributor to this dismal performance. So no wonder even Warren Buffett can’t find “inevitables”, because they no longer exist.


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