[ Copied paragraphs from equity master article for my reference.]
The profession of prediction is tricky. The consumers of predictions most often look for instant gratification. Unfortunately, it can become more important for the professional to look right rather than be right.
The talking heads on television predict everything about the next day that helps them look right. Mirroring the sentiment of the world helps them appear right. Rarely does anyone bother to check the accuracy of the prediction the next day.
Predictors go to great lengths to create an impression that appears right. Every impression has the potential to mislead investors. The truth is that every decision based on predictions can be a double-edged sword. The skill of human beings lies in being broadly correct rather than being precisely wrong.
- If you invest, you will lose money if the market declines. If you do not invest, you will miss out on gains if the market rises.
- Market timing can add value if it can be done precisely right. Buy and hold can produce better results if the market timing can’t be done right.
- Aggressiveness will help when the market rises but hurt when it falls. Defensiveness will help when the market falls but hurt when it rises.
- If you use leverage, your success will be magnified. If you use leverage, your mistakes will be magnified.
- If you concentrate your portfolio, your mistakes will kill you. If you diversify, your payoff from your successes will be limited.
It is not difficult but rather impossible to always make favorable decisions for the portfolio based on accuracy of predictions.