If someone asks you which are some of the historical events that had impacted the world economy? Some of the common answers would be; World Wars, Great Depressions, 2008 crash in the stock markets, the bankruptcy of Lehman Brothers and so on. These were some of the key events that changed the direction of global economy. But were these events ever predicted? So in this highly unpredictable world, what is the significance of forecasting? Isn't it a little naive on our part to assume that we can predict markets and companies performance in future?
Financial lives are ruined when people in lure to make high profits tend to go beyond their risk appetite and invest based various forecasts, without being prepared to react to adverse events. For example, the bubble burst in 2008 when the US housing market crashed. This had impacted the global economy.
In our view, volatility and uncertainty cannot be avoided. Investors will be better off if they keep some investing aspects in mind. We believe it is dangerous to invest in a stock based on certain events alone. If the fundamentals are weak, investing in the stock on the basis of one likely positive event is highly risky according to us. It makes more sense to adopt a conservative stance and give value to the basic core business fundamentals of the company. This is because, even after factoring in various events there will be some variable which will remain uncertain. And the companies which are fundamentally strong will be better off. At the end of the day, the idea is to build wealth on the back of prudent long term investing focusing on the fundamentals of the business.
One should shield oneself from the biased forecasts and predictions for buying the stocks or making any investments. The core idea should be looking into attractive valuations which have strong fundamentals. That is buying something that is trading below is intrinsic value. However, at the same time one should also keep some margin of safety. And this can be done through asset allocation.
Do you believe investments should be based on various forecasts? Share your views on Equitymaster club.