May 282015
 

Economics is the only profession where you can gain great eminence without ever being right. Remember earlier this year when just about everyone anticipated higher interest rates, but then the Bank of Canada slashed rates instead? If mainstream economic predictions were right interest rates would be a lot higher by now, our wages would have grown to keep up with the cost of living, and Vancouver real estate would become more affordable. But that is clearly not the world we live in today. Nobody has a crystal ball to see into the future. If they did, the only people winning the lottery would be fortune tellers. It’s funny how the same people who laugh at fortune tellers take economists seriously. 😛 Okay, enough bashing on economists. They are actually good and respectable professionals. And we need them to make weather forecasters look good. 😛 Sorry.

Economics is complicated, but it doesn’t have to be hard. One way to understand the current situation we’re in is to read more history, and fewer forecasts. If we’re going to buy a specific stock we can look at its historical chart and determine what events caused it to move higher or lower. Reading stories or biographies of famous investors like George Soros, Peter Lynch, or Benjamin Graham can give a sense of how the smart minds think about situations and prepare us for when history repeats itself.

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Financial markets have a very safe way of predicting the future. They cause it. 😀 But don’t count on anyone to tell us when and how the next recession is going to happen. My Apple shares are up 50% over the last year, some bulls believe it still has room to rise. But bearish pundits think the stock market could correct at any moment. Some think the Canadian real estate market will remain elevated, while others below the bubble will burst so it’s better to rent than to buy right now. At the end of the day all of those are just peoples’ opinions. They’re only right until they’re wrong.

There will always be conflicting forecasts. Markets can rise and fall, but not do both at the same time. There are two sides to the same coin. When advocates of one side are right the other side loses. But there’s actually a third side to the coin that not everyone knows about; the edge! That’s where we want to be. We want to straddle the edge so we can take advantage of both sides, be it bullish or bearish, and spread out our financial risk. We can’t predict the future but we can sure prepare for it. 🙂

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Random Useless Fact

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Anon
Anon
05/30/2015 5:25 am

“Financial markets have a very safe way of predicting the future. They cause it.”

Have to disagree.
Financial markets are merely a record of responses, a time-delayed mirror, if you will. Markets cause nothing.

Anon
Anon
06/01/2015 5:36 am

What DON’T the markets respond to these days?! From Fat Fingers to Fake Tweets, everything moves markets.
A good example would be when Buffett announced he bought a chunk of Suncor (SU), the price of SU stock jumped…but he had already bought the stock 3-4 months prior to the public announcement, during which time the stock performed “normally”. The market didin’t respond to Buffett buying the stock, it responded to people’s response of Buffett buying the stock.

(Market movements always arrive AFTER the event. The market is never the cause nor creator of anything (e.g. the Great Depression, the Financial Crisis, et al), it is merely the responder.)

When you buy stock, you are buying the qualities of the underlying company, but at the same time exposing your money to the sway of The Market…a double edged sword. As Ben Graham explains: in the short run, the market is like a voting machine, but in the long run, the market is like a weighing machine.

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