The hardest part about investing isn’t predicting what’s going to happen; it’s predicting how investors will react. I mean, granted the first part of that sentence is extremely difficult, but the second part is completely impossible. This is one of my main credos with investing; even if you knew the news tomorrow, making money would be anything but a slam dunk.
I was reminded of this by a tweet from Meb Faber. If you knew in March 2022 that the Fed would take rates from 0 to 5%, you would sell all of your stocks and buy as many puts as you possibly could. And yet the stock market is somehow up since the time they started hiking. If the last 18 months haven’t humbled you, you’re not paying attention.
Here’s another example, maybe more powerful than the previous one. Again, if you knew what the Fed would do and that mortgage rates would go from 3 to 7%, would you be swinging for the fences on the big short 2.0? Welp. In July 2023, the median home price was up 1.8% year over year. Housing affordability is at a multi-decade low, and still, prices won’t budge.
Returning again to the fed and their 500 basis points worth of rate hikes. This was done to slow economic activity and ultimately cool inflation. Prices are not increasing as fast as they were last year, but now economic activity is re-accelerating! What?!?
GDPNow is estimating a staggering 5.8% real GDP increase in the third quarter. Whether or not that comes to fruition, we’ll see, but the fact that a formulaic forecast is showing these numbers is absolutely mind-boggling, considering that the fed was doing everything in its power for the opposite to happen.
So if we don’t know what will happen, and if even knowing wouldn’t be helpful, then you should think twice before you turn your entire portfolio over based on a hunch. Some moves around the margin won’t kill you, but extreme moves in an uncertain world almost always come back to haunt you.