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Why It’s So Incredibly Tough For Investors To Predict The Future

A few days back, my U.S.-based colleague Morgan Housel had penned a great article. In it, he listed a number of scenarios where a huge gap had appeared between performances and outcomes in the world of finance.

Here’s a sample:

“Cigarette consumption has dropped 44% since 1981. Altria stock is up 71,000% since 1981.

…2009 was one of the worst years for the [U.S.] economy in a century. The [U.S. stock] market rose 27%.

2015 was a good year for the [American] economy. The market rose 1%.

Brazil’s economy is a disaster. Its stock market is flat over the last two years.”

Morgan’s examples were mostly centered on the U.S. So, I thought it’d be a good idea to introduce some of my own observations of what has happened in Asia and Singapore, just to show that a similar gulf can exist as well in the financial arena in other parts of the world. Here they are:

  • China’s economy grew by 15% annually from 1992 to 2013. Its stock market fell by 2% per year in that period.
  • Profits at Straco Corporation Ltd (SGX: S85) were up by 30% in 2015. Its shares are down 13% over the past year.
  • Singapore’s economy expanded by 6.1% in 1999. Stocks, as measured by the Straits Times Index (SGX: ^STI), spiked by 78%.
  • The economy did even better in 2000, growing by 8.9%. Stocks here plunged by 22%.

So, just why is the future so hard to predict for investors? Morgan explains in his aforementioned article:

“It’s mostly because the future is more random than we think. But it’s also because future performance (like earnings and economic growth) doesn’t tell you half of what you need to know to predict future outcomes.

Outcomes are determined by performance within the context of expectations, with importance heavily weighted toward the latter. And if predicting future performance is hard, calibrating them against expectations is close to sorcery.”

In a 2014 interview, Howard Marks, an astute market commentator and the co-chairman of the giant investment firm Oaktree Capital, commented that “one thing you can never be sure of in the investment world is if <<if A, then B>>. Processes and linkages are not always predictable.”

If Company A’s earnings grow, then its stock will do well. That’s generally true. As billionaire investor Warren Buffett once said, “If a business does well, the stock eventually follows.” But, it may not always be true. Many other things fall in between a company’s earnings growth and its stock price appreciation, as Morgan had explained.

For those of you who are investors, it’s worth noting how hard it can be to predict the future, especially if you’re attempting to do so by focusing on just one factor.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any company mentioned.