A recent note from Morning Star South Africa reminded me about the S&P500 predictions from January last year. The average target for the year-end from 20 Wall Street strategists was 4,861, with the highest being 5,400. Yet at year-end S&P500 trading was almost 6,000.
Predictions are hard. But it gets harder.
Take our postponed budget. On the morning of the budget the rand was trading at R18.40/$ and if you’d predicted the budget would be postponed by three weeks you’d have likely assumed the rand would collapse.
Well, it did weaken a little ahead of the expected 2pm speech, trading around R18.50/$ by 2pm and it then went on to lose another 5c.
Yet by Friday morning, as I am writing this piece, it is trading at R18.33/$.
In other words getting the prediction right is only half the job; knowing what will happen then is the other half, and it’s no easier.
The reality is that investing is in many ways about predicting. What will your favourite stock’s revenue do? Will margins, and hence profits, expand? What will the dividend be?
That’s a lot of predicting and we have all seen great results from a stock, only to be followed by a lower share price as the market focused on something other than just revenue and profit growth.
So how do we manage this? Instead of trying to make short-term predictions we should rather focus on big longer-term trends.
For example, one prediction we can make with ease is that people will eat; we have to to survive. So food retailers and producers must be a decent space for investing.
But which food retailer? The answer here is easy (to my mind): buy the best, which remains head and shoulders above the rest — Shoprite*.
Next comes the price.
I have written before that the only two things we control in investing is what to buy and what price to pay.
So we need to decide what we consider a fair price we’re prepared to pay for Shoprite and then we wait for the actual price to reach that amount.
What we’ve essentially done is try to remove the need for big predictions and then follow up what happens if we’re right. We keep it simple with trends that are easier to spot and long term in nature. Then we find the winners within that trend and focus on paying the right price. We’ll still get it wrong at times, but smaller decisions are easier and less risky to our portfolios.
As a last point: food producers. Yes, we need to eat but the producers get squeezed from both sides. Input costs are beyond their control and can squeeze margins while the retailers are always trying to get a better price. So, yes, we need to eat but food producers are not necessarily that profitable.
*The writer holds shares in Shoprite
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