Predicting the Past

Your mind can deceive you.

That’s one old lesson from the new emphasis on brain science and investing. For example, two-in-a-row of anything tends to make us expect a third. We may not admit this expectation to ourselves, but it is real, automatic, and uncontrollable. Our belief that the recent past will be repeated informs most of our actions—from where we plan to see a police car on the way home to what we think the stock market is going to do next month.

Which brings us to the current market. There are plenty of studies comparing the current market to 1974, or 1929, or 1492, or whatever. The problems is, the Arab Oil Embargo or Tech Crash or discovery of Peruvian Silver has little to do with the latest financial panic brought on by a housing boom-and-bust cycle. Our current problems are unique. And while human nature never changes, the winners and losers that arise from this market will be different. Or not.

Every situation is unique. That’s the risk in “risk-and-reward.” But residual claims on cash-flow see the greatest upside from growth. That’s the reward. Carefully balancing risk and reward is the job of portfolio manager. And no amount of tea-leaf reading can substitute for solid fundamental analysis and rigorous testing. That’s the way to make portfolios grow.

What’s the market going to do next month? Beats me. But I know that well-managed companies with solid business plans will pay their debts and provide returns for their shareholders. And that’s not just in your mind.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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