Stop Trying To Second-Guess The FTSE 100!

Like every human being, I’d love to be able to accurately predict the future. I’d love to know which numbers will come up on Saturday night’s lottery, which stocks from the FTSE 100 will be the ten baggers and, as Charlie Munger once said, would love to know where I’m going to die – just so I never go there.

The problem, though, is that I can do none of those things. While unfortunate, I and all human beings must accept that when it comes to knowing what’s going to happen at any point in future, we haven’t got a clue.

Known Unknowns

That’s not to say, of course, that forecasting is a waste of time. Clearly, it makes sense for businesses to make predictions about staff requirements, how much capital they will need this year and next, as well as how to allocate resources most efficiently and effectively. Similarly, it makes sense for companies to provide guidance to investors on where they see opportunities being over the medium to long term, and how quickly they envisage their profitability rising should things go to plan.

Such forecasts help in the investment decision making process. However, other types of prediction are far less helpful and, in actual fact, are more of a hindrance to investors seeking to increase their net worth. Take, for example, the Greek debt crisis. A number of investors have sold many of their stocks because they think that bad news will eventually emerge from Athens which will cause a major challenge for the EU/Euro and, in turn, cause stock markets to plummet. Similarly, other investors are piling in to the stock market because they think a deal will be struck and, as a result, share prices will soar over the short run.

The truth is, though, that not even the individuals who are undertaking the negotiations have any idea whether a deal will be struck. Both sides are clearly playing hardball and attempting to obtain the best possible terms for their side. Therefore, there is no way of knowing whether a compromise will be reached until it is and, as such, backing either side equates to little more than a punt.

The Alternative

Of course, investment is, to an extent, all about timing and many investors may say that events such as the Greek debt negotiations provide an opportunity to time the market. However, this seems to be a rather flawed strategy, since neither you nor I have any ability that enables us to foresee the future better than the next investor. And, by thinking that we can time the market, we may be leading ourselves into a false sense of security; wasting time that could be spent doing other things, and generating returns that are not particularly appealing.

However, there is a method that I believe is much more logical. It is to accept that nobody can accurately predict the future and then to invest in a diverse range of high quality companies when they are trading at what you believe is a fair price, and also to buy at regular intervals rather than piling in. By doing so, you may be surprised at just how impressive your returns are, but even more taken aback at just how much more time you have for other pursuits and how little you worry about the inevitable known unknowns of the investment world.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.