On February 9, 2001, in accordance with last Thursday's announcement, the Rule Breaker Portfolio purchased 41 shares of Standard & Poor's Depositary Receipts, better known as Spiders (AMEX: SPY) at $132.69 per share. The shares cost $5440.29 plus an $8 commission for a total cost of $5448.29.
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Every new year, the question most frequently asked in financial circles is "What will the stock market do this year?" Every year, the answer should be, "I don't know."
Unfortunately, however, most of the Wise in the business believe that they can predict what will happen in the next twelve months, even though the stock market's performance is contingent upon thousands of worldwide variables and the unforeseen.
A recent 25-year study by the National Bureau of Economic Research found that annual economic growth estimates provided by analysts for the year ahead are typically incorrect by 100% or more (recent estimates were for about 2.6% annual U.S. economic growth). Plus, estimates have not become any more accurate in the past decade with much better technology. Why not? Because even computers can't predict world events.
The economic expansion that began in the U.S. in 1991 is the second-longest in this century following the Industrial Revolution, and yet, nobody accurately predicted it!
Science shows that very large events -- earthquakes, volcanoes, and hurricanes -- are easier to predict than smaller earthquakes, volcanoes, and hurricanes. A scientist can measure the activity beneath the earth's surface to predict when Mt. Saint Helens is likely to erupt with more accuracy than he or she can measure the slumbering activity beneath a dormant volcano in the Virgin Islands.
The U.S. stock market is the most heavily researched, written about, and analyzed market in the world -- by literally thousands of investment professionals. Far too many of these Wise people who follow the market closely, day-in and day-out, have made very good careers by portraying an ability to predict the market, thereby advising investors on where stocks are next headed. Sometimes -- very rarely, but sometimes -- they're right. With luck.
Yet the intelligence of these thousands of people all focused entirely on the stock market has resulted in exactly zero accurate predictions on where this market has been headed since 1994. You would think, if anything, that the recently explosive stock market -- akin in power to the earthquake that leveled all of Lisbon, Portugal in 1755 -- would have been at least somewhat predictable, especially given all of today's "modern" market-watching tools and the number of high-paid investment experts in the industry.
But it wasn't predictable. Nobody predicted it. An advance that large, that monumental -- and nobody foresaw it. And yet people still make the mistake of listening to advisors when they claim to foresee even very small, short-term market movements.
Ponder that for a moment. A Fool should ask:
"If all the professionals in the world didn't foresee the recent giant 140% advance during four years' time, how can they possibly claim to foresee, for example, a small 10% decline in stocks in the next two months? The very notion is ludicrous!"
Yet in magazines, newspapers, on the Internet, and on television, too many financial advisors are still pretending to know where the market is likely to go next, even in the short term. They hint at their feigned knowledge by wearing fancy suits and expensive watches and then by having the phone number to their offices flash on the screen:
"Call us. We'll help you to invest in this tough market. We know how."
But if you feel that you need a professional to help you invest your money because the market volatility has you concerned, remember that professionals did not predict the recent advance -- the largest four-year advance and, therefore, conceptually one of the most predictable in history. It's just as likely that nobody will be able to predict the market accurately over the next four years, either. So, a Fool is left with his or her own Foolishness and long-term outlook to carry them. There is no great sage.
But what about market declines?
When Portugal's largest earthquake struck Lisbon in 1755, it was a Sunday and most of the city's people were in church. The earth was moving wildly, shaking the buildings, so everyone ran out of the cathedrals and into the town's large square along the bay -- for safety. There, in the safety of the square, a giant tidal wave greeted them, carrying away at least 40,000 people.
Not nearly as horrific, but ironic just the same, is that many people took money out of "inflated" U.S. stocks in 1996 and invested in the booming Asian economy (which quickly went bust). And some people sold out of equities entirely and shorted stocks after 1995's advance.
Reacting to what you think is going to happen, or moving to presumably protect yourself from one potential danger can often be more dangerous than simply staying the course. Invest in what you know and strongly believe in, and invest with the long-term trend. Once you begin to need your money to live -- after retiring, perhaps -- you should reconfigure your investments; but for the majority of the country, what stocks do over the next five years should be relatively meaningless.
The main point for today: If nobody could predict such a wonderful bull market as the one that we had from 1995 to 1999, how can anyone predict any nuances of the stock market going forward? They can't. So, as the market predictions for 2001 roll out (and they will), tilt your jester cap atop your head, smile, and just stay your course.
To close today on anything but trivial news, Celera (NYSE: CRA) released its map of the human genome. Celera is finding that we have closer to 30,000 genes, rather than the 100,000 that was estimated, and we're really not much different, when it comes to genes, than the yeast that serves to make bread. Reassuring, isn't it? Sunday's Washington Post ran an excellent article on the findings. The findings go far to confirm Human Genome Science's (Nasdaq: HGSI) belief that proteins are a vitally important aspect of our make-up.