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This article originally published in 2009 in fool.co.uk. I'm sharing this due to the necessity of the present situation.
Nobody knows what is going to happen next. Here's how to plan for it.
Screenwriter William Goldman famously said the thing to remember about Hollywood is that "nobody knows anything".
Nobody knows which movies will fly, and which will flop. And afterwards, nobody knows why.
The same can be said about the global economy. Will it recover, or will it collapse? Nobody knows.
Or stock markets. Will the FTSE 100 end the year at 5,000 or 3.000? Nobody knows.
Or the outlook for sectors and countries. Are we in for a commodities rally? Will smaller companies outperform blue-chips? Can China continue growing at the same rate? Will Japan ever recover?
Nobody knows.
A lucky guess
Plenty of people claim to know, of course. They might even be able to produce a few scraps of evidence to back up their claim.
With a bit of Googling, you can find articles listing the very clever people who predicted the credit crunch. Although they didn't say when. Or how.
They probably predicted lots of other stuff as well, but we don't remember that, because they got it wrong. Getting lucky once doesn't mean you actually know.
Because nobody knows.
Inflation or deflation? Nobody knows
A couple of days ago, I read a harrowing article warning of the continuing dangers of deflation.
Then I clicked on another article directly below it, on the same page of the same newspaper website. The author was giving a harrowing account of the continuing dangers of inflation.
They were both equally convincing. But neither of them actually knows.
Yesterday I read a fund manager claiming US Treasuries are set to rally over the summer. Over the weekend, another manager was claiming they would slump.
Who knows?
Jim can't fix it
Nobody knows. Jim Rogers doesn't know. In January, he panicked everybody by claiming the UK was finished, and investors should sell sterling. The pound has since risen 20%.
Warren Buffett doesn't know. He lost $25 billion last year. Fool UK co-founder and writer Bruce Jackson doesn't know (oops, this could be my last commission). He has lost money in the crunch, like the rest of us.
And please don't ask me, because I don't know. If I did, I wouldn't have taken out a pension with Equitable Life in 1999, invested in Aberdeen European Technology in February 2000, or tried to call the bottom of the commercial property market last spring (they're still looking for it).
Know your limitations
So what is to stop us from losing faith in stock tipsters, analysts and fund managers, and simply leaving our money in a spread of tracker funds?
Nothing, actually. If you know you don't know, and don't want to spend time trying to know, this is a thoroughly respectable strategy.
And if the thought of not knowing whether your portfolio will be up or down 10% next week gives you sleepless nights, then you are quite within your rights to opt for the certainty of a fixed-rate savings bond instead.
Not knowing never stopped anybody
But the fact that nobody knows anything hasn't stopped Hollywood from making movies, and it shouldn't stop you from buying shares or funds.
You will no doubt get your fair share of turkeys, but hopefully they will be outnumbered by the blockbusters.
So here are my four investment rules for people who know nothing. There were originally three, but then I thought of another one.
I didn't know that was going to happen.
* Accept you don't know. Find out all you can about a company before investing. How good is its management? Is it making a profit? Are sales rising? How is the dividend? Is it cash-strong? What are the barriers to entry for competitors? Or better still, sign up to Maynard Paton's Champion Shares and let him do the legwork for you. But you must also accept that the more you know, the more you don't know. You don't know if the dynamic chief executive is about to take early retirement on health grounds. You don't know what its rivals are up to. Or whether there is another banking crisis around the corner. So you are effectively taking an educated guess on what you do know, and crossing your fingers about what you don't. There are no guarantees.
* Don't believe anybody who claims they do know. We've all had our share of hot stock tips, companies that cannot fail. Some did quite well, looking back, others didn't. That's how it goes. By all means listen to your friend, but top-up his partial knowledge with some of your own.
* Know the right things. I've rashly said that Bruce Jackson doesn't know, but there are plenty of things he does know. He knows the warning signs of a downturn. He knows The Fastest Way to Lose a Million. He knows how to prosper in flat markets.
* Know your own strategy. Draw up some rules to guide you in both good times and bad. Spread your risk. Remember that investors have a habit of buying at the top and selling at the bottom. Remember The Importance of Dividend Yield. Remember that Most Shares are Losers. Remember the Four Reasons to Sell a Stock. And finally, teach yourself How to Play the Long Game.
There will still be a mountain of stuff that you don't know, but you don't have to know everything, just enough.
BY Harvey Jones
http://www.fool.co.uk/news/investing/investing-strategy/2009/06/25/nobody-knows-anything.aspx
Nobody knows what is going to happen next. Here's how to plan for it.
Screenwriter William Goldman famously said the thing to remember about Hollywood is that "nobody knows anything".
Nobody knows which movies will fly, and which will flop. And afterwards, nobody knows why.
The same can be said about the global economy. Will it recover, or will it collapse? Nobody knows.
Or stock markets. Will the FTSE 100 end the year at 5,000 or 3.000? Nobody knows.
Or the outlook for sectors and countries. Are we in for a commodities rally? Will smaller companies outperform blue-chips? Can China continue growing at the same rate? Will Japan ever recover?
Nobody knows.
A lucky guess
Plenty of people claim to know, of course. They might even be able to produce a few scraps of evidence to back up their claim.
With a bit of Googling, you can find articles listing the very clever people who predicted the credit crunch. Although they didn't say when. Or how.
They probably predicted lots of other stuff as well, but we don't remember that, because they got it wrong. Getting lucky once doesn't mean you actually know.
Because nobody knows.
Inflation or deflation? Nobody knows
A couple of days ago, I read a harrowing article warning of the continuing dangers of deflation.
Then I clicked on another article directly below it, on the same page of the same newspaper website. The author was giving a harrowing account of the continuing dangers of inflation.
They were both equally convincing. But neither of them actually knows.
Yesterday I read a fund manager claiming US Treasuries are set to rally over the summer. Over the weekend, another manager was claiming they would slump.
Who knows?
Jim can't fix it
Nobody knows. Jim Rogers doesn't know. In January, he panicked everybody by claiming the UK was finished, and investors should sell sterling. The pound has since risen 20%.
Warren Buffett doesn't know. He lost $25 billion last year. Fool UK co-founder and writer Bruce Jackson doesn't know (oops, this could be my last commission). He has lost money in the crunch, like the rest of us.
And please don't ask me, because I don't know. If I did, I wouldn't have taken out a pension with Equitable Life in 1999, invested in Aberdeen European Technology in February 2000, or tried to call the bottom of the commercial property market last spring (they're still looking for it).
Know your limitations
So what is to stop us from losing faith in stock tipsters, analysts and fund managers, and simply leaving our money in a spread of tracker funds?
Nothing, actually. If you know you don't know, and don't want to spend time trying to know, this is a thoroughly respectable strategy.
And if the thought of not knowing whether your portfolio will be up or down 10% next week gives you sleepless nights, then you are quite within your rights to opt for the certainty of a fixed-rate savings bond instead.
Not knowing never stopped anybody
But the fact that nobody knows anything hasn't stopped Hollywood from making movies, and it shouldn't stop you from buying shares or funds.
You will no doubt get your fair share of turkeys, but hopefully they will be outnumbered by the blockbusters.
So here are my four investment rules for people who know nothing. There were originally three, but then I thought of another one.
I didn't know that was going to happen.
* Accept you don't know. Find out all you can about a company before investing. How good is its management? Is it making a profit? Are sales rising? How is the dividend? Is it cash-strong? What are the barriers to entry for competitors? Or better still, sign up to Maynard Paton's Champion Shares and let him do the legwork for you. But you must also accept that the more you know, the more you don't know. You don't know if the dynamic chief executive is about to take early retirement on health grounds. You don't know what its rivals are up to. Or whether there is another banking crisis around the corner. So you are effectively taking an educated guess on what you do know, and crossing your fingers about what you don't. There are no guarantees.
* Don't believe anybody who claims they do know. We've all had our share of hot stock tips, companies that cannot fail. Some did quite well, looking back, others didn't. That's how it goes. By all means listen to your friend, but top-up his partial knowledge with some of your own.
* Know the right things. I've rashly said that Bruce Jackson doesn't know, but there are plenty of things he does know. He knows the warning signs of a downturn. He knows The Fastest Way to Lose a Million. He knows how to prosper in flat markets.
* Know your own strategy. Draw up some rules to guide you in both good times and bad. Spread your risk. Remember that investors have a habit of buying at the top and selling at the bottom. Remember The Importance of Dividend Yield. Remember that Most Shares are Losers. Remember the Four Reasons to Sell a Stock. And finally, teach yourself How to Play the Long Game.
There will still be a mountain of stuff that you don't know, but you don't have to know everything, just enough.
BY Harvey Jones
http://www.fool.co.uk/news/investing/investing-strategy/2009/06/25/nobody-knows-anything.aspx
