The Investment Scientist

If One Could Only Predict The Market …

Posted on: June 8, 2022

It appears to me that in times of great uncertainty, people want me (a financial advisor) to know where the market is heading the most. Certainly, I have my informed opinions, bringing all my education and experiences to bear. But I often find myself having to explain that I can’t see into the future and tell them exactly what the market is going to do, all I can provide is informed guesses, and long-term investment success should not depend on guesses, informed or otherwise.

Today, let’s do a mental exercise: imagine I can actually accurately predict the market. If an ordinary person had $10,000 to invest in the S&P 500 index on 1/1/2000, by the close of the market yesterday his investment would have grown to $45,320. Not too bad!

What if I could predict the market and I could go long or short every month based on my market prediction, with the same $10,000 investment on 1/1/2000. How much do you think I would have grown the money to by now? 

It would be $16mm!

In fact, I could do even better since I could do leverage bets. That is, instead of merely going long or short with the market, I could go 2x long or 2x short with the market. When I did this with the same $10,000 on 1/1/2000, guess how much money I would have by now?

$18+ billion!

Do you think I would still need to work as a financial advisor?

Here is the important takeaway from this exercise: any financial advisor who claims to predict the market is a fraud! If he truly could, he wouldn’t need the job!

So if financial advisors can’t predict the market, how can they add value? I can’t speak for others, but here is what I do: I help my clients make smart decisions based on events that have already happened, not on guesses about the future. 

You might ask: are there smart decisions to be made when the market falls? Yes! It’s an opportunity too good to pass up.

  1. It’s a great opportunity to do tax loss harvesting (resulting in over $100k worth of tax savings for some clients.)
  2. It’s an opportunity to acquire more productive assets on the cheap. So the assets my clients own are more numerous now!

Schedule a 2nd opinion financial review, buy my wealth mgmt books on Amazon.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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