I Did this Instead of Predicting a Big Crash and Never Looked Back

Apr 5, 2021

Rahul Shah, Editor, Profit Hunter

I still remember how WhatsApp University was in total overdrive this time last year.

The fast spreading pandemic had tied people up in knots. They were willing to lap up any advice that came their way on tackling it.

And WhatsApp University was only too willing to oblige.

There was barely a day where there weren't dozen or so messages from self-proclaimed experts of all kinds on keeping the virus at bay.

While some of these were certainly useful, there were others that were outright silly.

And to make matters worse, even the silly ones were finding a lot of takers.

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Morgan Housel, one of my favourite columnists, argues and quite rightly so, there is a correlation between payoffs and people's willingness to believe nonsense.

If the reward for following the correct prediction is extremely high, you will find people ready to believe a lot of trash.

Morgan further goes on to add how during the great plague of London, in 1665, the people listened with rapt attention to the predictions of quacks and fanatics.

At that time, people were more addicted to prophecies and astronomical conjurations, dreams, and other such practices than ever they were before or since.

Such was the fear of death that people were willing to listen to anything that gave them hope of surviving the plague.

Well, history may not have repeated itself.

But it did certainly rhyme when people reacted in a similar manner to the Coronavirus pandemic.

Can you identify any other field where correct predictions has an equally big payoff?

Investing of course. The reason that people are all ears to anyone making a stock market prediction is because the payoffs are huge.

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A correct prediction on the stock market can help you position your trades accordingly and make a tidy fortune.

In fact, all you have to do is get 3 to 4 of such predictions right and you can achieve financial independence.

Well, that's the good news.

However, the bad news is that just as the plague or the Coronavirus, there's barely anyone out there who can make correct stock market predictions on a consistent basis.

The stock market isn't like physics where a certain input leads to the same output every single time.

The market is populated with participants that are highly emotional and sentimental. To predict what kind of news would lead to what kind of reaction from them is extremely difficult.

In fact, most long term successful investors that I know of, have earned their enormous fortunes by ignoring the broader stock market.

In fact, trying to predict whether the stock market is due for a big crash, is highly counterproductive as per them. It can only harm instead of helping your long term returns.

If you don't believe me, here's what some of these successful gentlemen have to say about market crashes.

  • We don't buy and sell stocks based upon what other people think the stock market is going to do (I never have an opinion) but rather upon what we think the company is going to do. - Warren Buffett.
  • In all my 55 years on Wall Street, I was never able to say when the market would go up or down. Nor was I able to find anybody on Earth whose opinion I would value on the subject of when it would go up and down. - John Templeton
  • Even in good markets we have declines and trying to predict its direction over the near term is an exercise in futility. - Peter Lynch

So, there you are.

Investors far more successful and far more experienced than the average investor admit they have no idea if the market is going to go up or down in the near future. In fact they even ignore it completely.

Thus, at the risk of sounding repetitive, I have for quite some time now believed what really moves the needle of investing performance is striking the right balance between offense and defense.

Let me elaborate by going back to March 2020.

You see, even though the economic uncertainty was huge back in March 2020, it was a good time to play offense. In other words, take a big exposure to stocks.

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This is because the valuations were so low, they were already factoring in the worst. Thus, while the downside was limited, the upside was huge.

This is precisely what happened.

We had one of the biggest and the fastest bull markets in recent times.

Right now though, it may be a good time to play defense.

The stock valuations seem to be factoring in a swift economic recovery. Thus, even if it materialises, the stock market may not move much.

This is because most of the near term upside is already factored in. However, a big negative development could cause stock prices to crash again.

Therefore, I think it's not a bad idea at all to hold a large amount of cash and be only partially invested in stocks.

At least that's what I have been recommending my subscribers of late.

I have asked them to not play the meaningless game of stock market prediction and always think in terms of playing offense or defense.

This strategy will serve them better than even the most sophisticated model of making stock market predictions.

What do you think?

Warm regards,

Rahul Shah
Rahul Shah
Editor and Research Analyst, Profit Hunter

PS: Dear reader, on Thursday, 15 April, Tanushree Banerjee, our expert on safe stock investing, will reveal potentially the greatest wealth-building event for your net worth. Join Tanushree at the India Revival Summit.

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