What is Value Investing?

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Making Sense of Market Forecasts

Most prognosticators miss the mark—but there are ways you can profit from their predictions.

By JASON ZWEIG

Every January, hordes of highly paid experts attempt to predict what the economy and the markets will do in the coming year. Later in the year, nearly all of the forecasts turn out to be wrong.

Here, we hope to offer something different: a blueprint for how to make practical use of these predictions, even when you suspect they are wrong. Taken together, forecasts can point toward the best and worst outcomes you can reasonably expect in a given year—and tell you how confident you should (or shouldn’t) be.

Forecasting is as old as markets themselves. Records from ancient Mesopotamia, according to research by historian Alice Louise Slotsky, are full of references to omens that were believed to predict commodity prices, such as “the raven is for a steady market.”

Practically ever since, pundits have been pumping out forecasts—and missing the mark. Think back over the past year, when technical indicators called the “Hindenburg omen” and the “death cross” were said to predict that stocks would collapse, China’s stock market was expected to keep booming and a “double dip” recession in the U.S. looked likely to many market experts. So far, at least, none of those things has happened.

If the forecasters are right for this year, then U.S. stocks will go up roughly 10%, 10-year Treasury yields will run around 3%, inflation will be a bit under 2%, and the economy will expand 3% or so. Yet it would be naïve to think you could bet accordingly.

Why do people with years of experience, massive expertise and mountains of data at their disposal so often get the future wrong?

First and foremost, the future is the realm of surprises; no one, no matter how expert, can reliably foresee what will happen and how people will react to it. As the economist Friedrich von Hayek said in his lecture “The Pretence of Knowledge” when he won the 1974 Nobel prize in economics, “in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process … will hardly ever be fully known or measurable.”

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The trap called guaranteed NAV

It is guaranteed,” said the relationship manager (RM), stretching the ‘ees’ for emphasis. He needn’t have. I got the idea, or at least, pretended to. The guaranteed- NAV Ulip (unitlinked insurance plan) would ensure that I earn the highest returns the market delivered during the tenure of the policy. A false smile in place, I sat back on the plush couch of the private sector bank.

Ostensibly, I was digesting the implication, guaranteed returns from an equities instrument for 10 years. The absurdity of the promise was clear. How are investors misled so easily? Don’t they crunch numbers or ask how the insurance company will assure high returns consistently? Oblivious to my thoughts, the RM had ordered two cups of coffee and the application form of the Ulip. May be it was my imagination, but his smile seemed smug.

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The Essays of Warren Buffett: Lessons for Corporate America – Lawrence Cunningham

Another Source

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Common Sense Investing – The papers of Benjamin Graham

Courtesy: Valuehuntr blog

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The Futility of Forecasting In The Stock Market

Most stock market forecasts are hopeless. The investor is better off betting on the fundamentals rather than market direction.

by Sanjoy Bhattacharyya

The professional investor desperately craves to know the future. The true mission is to read tomorrow’s newspaper today. Brokers, fully aware of this innate desire, are quick to sell gullible investors placebos — stock recommendations, earnings estimates, market forecasts, price targets — of minimal value.

Forecasting earnings, prices or the direction of the stock market with precision in the short-term is hopeless. Irving Fisher’s prescient comments just before the Great Depression in 1929 remain unsurpassed for being totally off the mark! But the story remains the same whether it was the dot-com bubble, the financial melt-down of 2008 or the Asian crisis in 1997-98.

What of the poor fund manager who needs to out-perform every month just to keep his job? As investors pile into a rising market and the avalanche of money builds, his best attempts to stay rational and focus on the long haul are destroyed. The need to invest first and investigate later is forced on him. Rather than be caught lagging behind his peers, he is better off watching Bloomberg like a hawk for every twitch in stock prices and making bets on quarterly earnings! The resultant herd mentality presents true opportunity for the more placid but truly consilient investor.

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Opportunities for Patient Investors – Seth Klarman & Jason Zweig

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