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.
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!
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.
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:
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.
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.
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:
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?