Yogi Was Right

With investments it’s all about the future. The value of any asset – stocks, bonds, crypto, rental homes, farmland, paintings, or precious metals – is the estimated future value the asset, discounted into today’s dollars.

If you can see the future better than other investors, you have an edge. And you can use that edge to make serious money.

The only problem is that knowing the future is not easy.

I always think of the movie “Back to the Future Part II,” where bad boy Biff Tannen goes to the future and snags a sports almanac, giving him the ability to profit from his knowledge when he returns to the past. That may work with sports betting, but not so much when it comes to investing in the stock market.

I’m convinced even if we know next year’s news it’s questionable how successful we would be exploiting it in the stock market.

Imagine being gifted on December 31, 2019, one newspaper from later in 2020 that detailed the story of a virus spreading across the world and eventually grinding the economy to a halt. If you were the recipient of that jarring news and you held a large portion of your net worth in stocks, I’m guessing your instinct would be to sell everything before it crashed.

And you would have been right. At least, initially.

The U.S. stock market quickly erased 34% of its value in roughly 30 days in early 2020 as the world went into lock-down. You would have looked like a genius. But that’s where the wisdom would have stopped. Because without knowing how events would unfold from that point on, I am again guessing most investors would have stayed on the sidelines throughout 2020.

If you recall, however, the year 2020 wasn’t a disaster from a stock market perspective. Quite the opposite. The U.S. stock market ended that year up 18%. By knowing the future, you likely would have missed out on an 18% gain.

That kind of overconfidence afflicts professionals, too.

In 1991 George Colony, head of Forrester Research, the prestigious firm that studies trends in the computer business, said in an interview: "Our belief is that Microsoft has peaked. I think Microsoft will be a big, struggling company in two years."

Allow me to share Microsoft’s stock market returns from 1991 to 1994, the year after Colony predicted Microsoft would be “struggling.”

1991: +122%

1992: +15%

1993: -6%

1994: +52%

From the time Colony made his prediction to the end of 1994, an investment of $10,000 in Microsoft would have turned into $15,500. That’s not exactly the sign of a big, struggling company. And the company and its stock would go on to reach far greater heights and value from there.

Think about that. Colony had direct access to the best data on the planet about the computer industry at the time. He routinely spoke with computer industry executives, gathering unique bits of knowledge unknown to other investors. And he still got it very, very wrong.

So, be careful about being overly confident in your views of the future, including which stocks will do well.

Yogi Berra, the quotable and charismatic catcher for the New York Yankees, is purported to have said, “Predictions are hard…especially about the future.”

He’s right – and it applies to “experts,” too.