"Those who have knowledge don't predict. Those who predict don't have knowledge." ~ Lau Tzu
Extending upon the recent discussion here on rationality, let's revisit one year ago today, October 6, 2008. The stock market was in free fall, declining nearly 10 percent in just five days, and the herd reaction was panic. As I think back to my own emotional state, I believe mine was also panic... but not for the same reason as the herd!
My panic was that others were panicking! My attempt to remain rational and orderly amidst irrationality and chaos may just have been, well, irrational! This hindsight observation begs the question, "When is it best to follow the herd and when is it not?" This may be the most common question on the minds of almost every investor, trader or asset manager when making investment decisions or giving recommendations, especially during extreme volatility.
If you are interested, feel free to read my blog post from exactly one year ago, Reasons Not to Sell Stocks Now. If you don't care to read it, here's the synopsis: As the herd was running for the exits, I was hyper-intentionally resolved to maintain my cool-headed contrarian stance. I can now admit that, in frustration, disgust and a bit of haste, I made the one and only "prediction" on this blog, which was that stock prices, as measured by the S&P 500 would close higher one year later and would even outpace the average money market fund!
What are the results of this prognostication? The S&P 500 closed one year ago, October 6, 2008, at 1056; yesterday (technically one-year later) it closed at 1040; and today, October 6, 2009, the S&P peaked intra-day at 1061 and finally settled at 1055, just a one point below its year-ago mark!
Of course, at the time, I didn't imagine how bold this prediction would appear, especially as the S&P 500 fell another 40 percent lower by March 9, 2009!
"There are no facts, only interpretations." ~ Friedrich Nietzsche
Those of you who have read this blog for long, know that I do not believe in making (or acting upon) predictions.
Without getting deep into a semantic analysis, one may argue that any action taken based upon an expected future result is a form of prediction. While this may be true, I should qualify my previous statement against prediction by saying that, in general, I believe it to be foolish to forecast an outcome that may be significantly influenced by the whims of human emotion.
On a lighter note, I can't help but think of some advice someone gave me with regard to emotions and personal relationships: "Would you rather be right or happy?"
This advice seems to work well with investing and financial markets, wouldn't you agree?