Forget prediction - just know where you are

The beginning of the year is always the time for predictions. I will make some and I will talk about the future. It is just part of the process of being an investor. However, I want to touch on what may be the most important issue - just knowing where you are at before you start to make new investment decisions.  

Think about anytime when you are our driving and lost. The question of the path you take, when you arrive, the driving conditions you will face are really of no consequence. The focus has to be on the more simple question of where you are at. Stop and figure that out first and than you can determine the new path. 

A doctor has to ensure that as a primary priority he will do no harm, the Hippocratic Oath. For those that are running portfolios, there is also a similar primary priority. Know the current environment. Know where you are at and then worry about predictions of where markets are going. Can you effectively describe what is the state of the business cycle. We can draw a simple sine curve to represent the normal business cycle. So where is the US economy on that curve. Are will near a peak? what is the amplitude of the curve? Where is the EU relative to the US on this curve? What about Japan? 

If you can get the position right you are ahead of most investors. Are equities over or undervalued? If you can answer that simple question, then forecasting can be easier. Can you describe the monetary policy environment? Can you say whether fiscal policy is loose or tight? Can you say something about other countries. Even if you get the forecast wrong, the cost will be less if we get the positioning right.  

I can easily argue that knowing where you are at can be as difficult as making predictions of the future, but it is the best starting place for any valuation discussion. Of course, if the environment changes and you have not made the right prediction, the cost will be high, but if you believe that the prediction game is like flipping a coin, then focus on the position game. Always know where you are. 

We can have a simple investment Hippocratic Oath  - Know what is the investment environment!