Investing–The New Rules: Stock Return Predictor Not a Case of ‘Too Good to be True’

The Great Karnac Knows (Not Quite) All!

When something sounds “too good to be true” it’s usually because it is. While the Stock Return Predictor won’t predict short-term gains, if an investor is interested in the long term, then the SRP is the ticket. It might even seem to be “too good to be true.”

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Investing — The New Rules
The Great Karnac Knows (Not Quite) All!
June 1, 2010

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I was on a long drive with my wife Boo one time and we ran out of interesting things to talk about. So I started telling her about the wonders of The Stock-Return Predictor. She didn’t say anything for a long time. So I asked her what she was thinking. “It sounds like baloney,” she said. “It sounds too good to be true.”

Yak!

She’s right. It does sound too good to be true. The Return Predictor takes the risk out of stock investing. It lets you know in advance whether stocks are going to pay off for you or not. Knowing in advance the return you are going to get is like having a gadget that tells you whether the person you are dating is really the one for you or not. This is something that absolutely everyone needs badly!

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So why have I had such a hard time getting people interested in Valuation-Informed Indexing, the investing strategy made possible by creation of The Stock-Return Predictor? People don’t believe it can work. “Yeah, sure, Rob, whatever you say,”is the common response. “You just go on predicting the future. I’ll stick with my boring old Buy-and-Hold.”

You gotta believe!

Here’s the thing. Predicting the future has gotten a bad name in investing circles. For many years people have claimed that they could predict the short-term future and failed to do so effectively. So when the experts tell people that “you can’t time the market,” it sounds like straight-shooting. People eat that stuff up. We believe people telling us bad stuff about stocks because we’ve heard so many stories of people who have gotten burned by listening to foolish good stuff that only bad stuff has the ring of truth to it anymore.

With the aim of getting you to believe how great a tool the Predictor is, I will now tell you what it absolutely cannot do and thereby perhaps gain a measure of your trust.

The Stock-Return Predictor cannot predict short-term returns. What most people want to know about stocks is how they will do over the next six months or in the next year or two or three. The Predictor does not tell you this. Use it for this purpose and it will fail you. I guaranty. When the Predictor tells you that stocks will be doing great in the long run, stocks may do awful in the short run. And, when the Predictor tells you that stocks will be doing awful in the long run, they may do great in the short run. If you are looking for short-term predictions, do not us this tool. Do not!

There’s another thing that the Predictor does not do. It does not offer precise predictions. The calculator reports the most likely annualized 10-year return for a purchase of an index fund made at today’s prices as 2 percent real. That’s not so hot, given the riskiness of stocks. You should be compensated for taking on risk and there are far safer asset classes that can provide you a 2 percent return or close to it. Stocks are not a good deal at today’s prices.

But wait. Take a closer look at what the calculator reveals. It does indeed say that there is a 50 percent chance of seeing a 10-year return of less than 2 percent real. But it also says that there is a 20 percent chance that your annualized return will be 5 percent real or better. There is even a tiny chance (one in twenty) that your long-term return will be 8 percent. An annualized 5 percent real return is solid and an annualized 8 percent real return is positively juicy. Could it be that the calculator is telling us that stocks are not such a bad deal after all?

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ALSO at DBKP:
* Investing–The New Rules: The Stock Investor’s Weather Report
* Investing–The New Rules: Harness the Power of The Stock Return Predictor
* Investing–The New Rules: Get the Odds on Your Side
* Stock Investing: Much of Today’s Understanding is Primitive

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It’s telling us that stocks are a bad deal. Yes, it is possible that those who invest heavily in stocks at today’s prices will end up okay or even better than okay. But the odds are against them. Valuation-Informed Indexers want the odds on their side. We aim to be the house in a gambling casino, not the gambler.

The Stock-Return Predictor really will tell you how well your stock investment is going to pay off in the long run. It will not tell you what is going to happen in time-periods of less than 10 years — so don’t get any funny ideas. And it will not even tell you what will happen in the long term with precision. There is not a tool that can do that. But the insights that the Predictor provides are what you need to gain a big edge over those who follow Buy-and-Hold strategies. Those are insights worth tapping into.

It’s too good to be true.

And yet it’s true!

by Rob Bennett
image: Adam’s Anecdotes

Rob Bennett recently wrote a Google Knol entitled “Why Buy-and-Hold Investing Can Never Work.” His bio is here. And don’t even think about failing to read these Important Cautionary Words.

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