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Why I’m Really Worried Now

Did you know that there is an unfortunate relationship between stock market-predictions by Wall Street experts and actual performances?

In the years when they thought that stock markets would go up a bit, shares actually went up a lot …..

And when they collectively predicted that stock markets would go up a lot, shares have tended to plunge.

It gets worse.

In the last 10 years whenever experts predicted that the stock market would deliver double-digit gains, it has dived.

According to investment advisor, Birinyi Associates, it happened in 2001, when strategists were forecasting returns of almost 20%. That was the year when the S&P500 dropped 13%.

The curse of the experts struck again in 2008, when they thought that the US market would deliver returns of more than 10%. But shares fell 38% that year.

Talk is cheap

In the first couple of weeks of this year, Wall Street strategists were busy scribbling down their predictions for 2018. The average estimate of major brokerages is that US stocks could rise 10% next year.

We should have known better. Their track record has been disturbingly inaccurate.

No sooner had the ink dried on their predictions than the stock market tanked in spectacular fashion.

We can make up our own minds about why these experts can get it so badly wrong.

Conspiracy theory

Popular theories range from blatant conspiracy to a need to peddle more investment products at any cost.

I feel sorry for those unsuspecting investors who were sweet-talked into buying products that bet on a lack of stock market activity.

The truth behind Wall Street strategists’ abject inaccuracy is probably much simpler.

The stock market can be highly unpredictable in the short term. When there are more buyers than sellers, stock markets could rise. When there are more sellers than buyers, they could fall. Simples!

Why worry?

For the last ten years or so, many traders had thought that the stock market was a one-way bet. What could possibly go wrong?

Those of you who know the Motley Fool, and understand my philosophy of investing, will probably be asking why their predictions have got me worried.

Have I lost my way wandered over to the “dark side”?

Am I not supposed to be the archetypal long-term investor who ignores short-term market fluctuations, regardless of their severity?

Let me assure you that I have not gone mad.

As an income investor, I am only interested in whether a share can deliver a sustainable return over the long run. The Stock Advisor team also continues to look for wonderful companies to buy at fair prices.

But I often worry about whether you have the right stocks in your portfolios.

Raging bull

There is little doubt that we have been spoilt by one of the longest bull market that started some eight years’ ago.

Despite the recent correction, the bull-run is still intact.

But if those all-knowing strategists have got it wrong again, and the stock market does fall further, then we want to ensure that the stocks in our portfolios are good ones…..

…. We want to know that they can recover after the fall.

We also want to know if they will continue to reward us, regardless of anything that might happen in the market.

Investing should never be about buying a share today in the hope that it might go up tomorrow. It’s great if that should happen.

It should be about estimating how a share will repay us over the time that we own it. As an income investor, I want to be able to estimate its payout from now to infinity.

Sleep easy

That is the way we should be looking at the shares in our portfolio. Our aim as investors should be to work out the yield on the asset over the lifetime of the asset.

That means buying outstanding businesses at sensible prices….

…it should not be about buying mediocre businesses at apparent bargain prices.

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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 Director David Kuo doesn’t own shares in any companies mentioned.