As an active investor, now is the time to start thinking about your investment strategy over the holiday season and into the new year.
Will the market fall from here?
Will it rally?
Or will it just go sideways?
In reality, any of those scenarios is possible.
Which do we say is more likely? With the S&P/ASX 200 just 600 points short of our year-end target of 6,000 points, we’re still betting on a year-end surge…
We often read and hear people (usually so-called professional investment advisors) say that making predictions is for mugs.
They try to take the high ground by claiming that they never try to predict future stock market levels. They usually say it with nose raised in the air as if predictions are beneath them.
We liken them to the chattering classes who claim they never watch commercial TV. Nothing but the ABC or BBC for them.
But we take the opposite view. In fact, if you’re not prepared to make some sort of prediction about the future, you’ve got no business investing in the first place.
Wrong and Still Make Money?
To us it just seems odd that any investor or analyst would say they don’t make predictions. Our bet is they say that because they don’t have conviction in their own analysis.
Can you imagine anyone in any other occupation saying they won’t make a prediction about the future?
Imagine an airline pilot saying that he can’t guarantee he’ll be able to land the plane or that he’s not even sure at which airport the plane will land. Or what about the bus driver saying she’ll try her best to complete the route but she can’t make any promises about where you’ll end up.
Even a plumber or parcel delivery service will give you a three or four hour window of when they’ll turn up.
And yet apparently, most investment pros insist they couldn’t possibly make any predictions about the future…but that you should take their advice anyway. Sure.
The fact is (and this should be obvious) as an investor you’re making predictions about the future all the time. If you buy a stock today you’re making a prediction that the stock price will be higher in the future.
If you don’t buy a stock today you’re making a prediction that the stock will be cheaper in the future.
You see? That’s investing. It’s about making predictions. They could be long term, medium term or short term predictions.
The important thing about making a prediction is that you do it with conviction and then reassess your position from time to time. But here’s the thing; in order to be a successful investor you don’t have to get every prediction right.
In fact, you can be wrong and still make money.
Staying on Target
Below is a chart of the S&P/ASX 200:
Source: Google Finance
Late last year we made our first prediction for the index. When the Australian market was around 4,500 points we said the index would reach 5,000 points by the end of 2013.
Just two months into 2013 the index hit 5,000 points. It was time to reassess our view. At that point we figured the low interest rate story would have a bigger impact on stock prices than we thought.
So we changed our year-end target to 5,400 points. Five months later the index had fallen to 4,600 points. Many thought we were stupid for being so bullish. So we reassessed our view again, but this time as far as we could see nothing had changed.
We stuck with the view that stocks would rebound and 5,400 points still seemed a reasonable target.
We kept that target until about six weeks ago. That was when we figured if the market had a strong year-end rally, you could easily see the main Aussie index hitting 6,000 points. That would be especially true after the US Federal Reserve decided it wouldn’t taper its bond buying program.
Such a level would have seemed improbable at the start of the year. And yet it’s within touching distance.
So, 6,000 points for the Aussie index. It will need to climb more than 10% in just seven weeks to get there.
As always, we can’t be 100% sure we’ve got it right. But if we have, we’ve helped you position your portfolio to make the most of it. In short, as it stands right now, the strategy for the last seven weeks of the year is the same strategy as the first 45 weeks of the year – buy stocks.
Cheers,
Kris+
P.S. If stocks take off to the degree we expect, it should be a great time for some of the Aussie market’s most speculative stocks – small-cap stocks. In our monthly small-cap advisory service, Australian Small-Cap Investigator, we’ve identified a string of stocks that could outperform the market if the rally continues. You can check it out here…
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