High-Percentage Bets on the Future

Successful investing requires making the right predictions about the future. Under all methodologies that can be accurately classified as investing rather than trading or guessing, valuing a company involves comparing a stock's current price with the value of all future cash flows discounted appropriately. It is critical that when you are assessing what to buy, you have some methodology for thinking about the future.

And that can get tough. When you're talking about discounting all future cash flows, rather than making a prediction about next quarter's earnings, or even the five-year growth rate, it can seem like a daunting task. The future, after all, is impossible to predict. There are always radically new technologies disrupting the status quo and huge demographic shifts that totally transform society.

Or are there?

The future according to cinema
Aggressive predictions about the future are, if they share one common trait, typically pretty far off the mark. I don't have data in front of me to support such a bold statement, so let's go about proving that anecdotally. This week, the American Film Institute released its list of the 100 Best Movie Quotes, and that's as good a source of mainstream anecdotal data as anything else I've got in front of me, so let's use that as our databank. There are five movies about the future that have quotations deemed one of the 100 best in American cinematic history. Let's gratuitously put the information into a table to make it look more like data:

We're now close enough in time to see that all of those futuristic visions are nowhere close to happening. I wouldn't be surprised if I could dig up quotes when Soylent Green came out in 1973 that hailed it as a perfectly viable prediction of one possible future -- that within 50 years (spoiler coming!) our planet would become so overcrowded that people would start eating each other. Now Europe and portions of America can't seem to produce enough babies to replace our population.

2001: A Space Odyssey was considered visionary, and while people might not have expected interplanetary contact by that time (though many surely may have), they certainly thought the space program would be more advanced than has proved to be the case over the past 40 years. You may differ with me on this, but I don't think machines will be taking over the planet, a la Terminator, within the next 20 years.

A different perspective
These movies posit radical, spectacularly different futures occurring over 40 years. George Orwell wrote 1984 in 1948 and considered 36 years a sufficient period of time to throw out a viciously different societal structure. But how much do things, and how much can things, change over that period of time? How hard is it to predict the future?

For one perspective on framing this question, consider instead this observation from The Age of Missing Information, by Bill McKibben. Longtime fans of mine (that's you, Mom) will recall the time I used his magnificent book as the inspiration to watch an entire day of CNBC's broadcasting, and to then inflict several thousand words on our readers as the result. To recap, in 1990 McKibben taped an entire day of all 100-plus channels of what was then the largest cable operation in the country's programming. He watched it all and then wrote a book about what he learned. I quote in relevant part:

[Something] occurred to me as I reclined in front of the TV watching the history of the last forty years. ... Daily life has scarcely changed between 1960, when I was born and the present. ... Here's the proof. You can watch TV shows that are thirty years old without any real culture shock. Big changes have taken place -- the semi-emancipation of minorities and women, the fall of the Communist empire, and so forth. But in material terms life on a 1960s sitcom closely mirrors life on a 1990s sitcom. If you walked into Samantha's kitchen in Bewitched, you would know how to make breakfast. In fact, you'd use many of the same products -- it's almost eerie, for instance, that the same sugary breakfast cereals that rotted my teeth still rot the teeth of American youth. The bird is still cuckoo for Cocoa Puffs, the rabbit still finds to his immense sadness that Trix are for kids.

As if to put an exclamation point on the lack of change, the remake of Bewitched, now starring Nicole Kidman and Will Ferrell, opens in theaters today.

What this means for investors
While the rabbit may be immensely sad that Trix remains out of his reach, General Mills (NYSE:GIS) shareholders have been enormously rewarded by how little the past differs from the present -- and from what the future will most likely be. Since the original S&P 500 was started in 1957, General Mills has been one of its top 20 performing stocks. In fact, according to Jeremy Siegel, seven of the top 20 performers in the S&P from 1957 to 2003 were stunningly non-revolutionary food producers:

I wouldn't be surprised if, with a careful eye and the patience to sit through the entire run of the series, you could spot the products of all of these companies in the Bewitched kitchen. Actually, I would be surprised. One thing that has dramatically changed in the intervening 40 years is product placement. All those products might be visible in the remade movie version, though, which would prove the same point from the opposite direction.

The point being: For superior long-term returns, it's not necessary to predict whether people will use wearable computers, clone themselves, or figure out teleportation 30, 40, or 80 years hence. It's easier to watch what what's going on right now.

Some high-probability bets on the future
Some investors try to make those high risk/high reward bets about radically different futures. In Motley Fool Hidden Gems, we've had some success over the past two years (up 32% vs. the market's 8%) working with "the future to us looks a lot like the present" theory. Some of the stocks that have doubled since recommendation are products of the following bold predictions:

Maybe I'm going out on a limb here, but I believe people will continue to die. And after they are dead, rather than pulling any kind of Soylent Green type of thing, society will continue to give them funerals. I'm playing the anti-Soylent Green card.

Or:

I'm betting on the trend of people eating their pizzas cooked. I'm totally betting against those who say pizzas of the future will be eaten raw.

And:

People running races, or exercising -- I think a lot of these people are going to wear sneakers, no matter what the clothing situation may have been in The Planet of the Apes.

That these stocks have doubled or more since recommendation is nifty and all, but remembering the above chart of long-term returns, the returns of the Hidden Gems successes are puny compared with what will happen in the future for patient investors. That future is more predictable than you may think.

Afree 30-day trialto Hidden Gems is yours for the taking and will reveal the names of the companies hinted at here if you haven't already figured them out. Actually, there are a couple other recommendations that have doubled (and one that has tripled) as well. And some that haven't, to be perfectly candid. Even some that have gone down a bit. Whatever -- you'll enjoythe free trial. You'll also enjoy the speechWill Ferrellmade at Harvard. Check it out, but be sure to come right back.

Bill Barkerowns none of the companies mentioned here and usually is less philosophical and more analytical in the Hidden Gems space. Coca-Cola is a Motley Fool Inside Value recommendation. Heinz is a Motley Fool Income Investor recommendation. The Motley Fool has adisclosure policy.